Risk of ruin is the probability that a string of losses wipes out your account before your edge can play out. It's the math that explains why position sizing is survival, not a detail.
The idea
Even a profitable strategy has losing streaks. Risk of ruin asks: given your edge and how much you risk per trade, what's the chance a bad run ends your account? Risk too much per trade and even a good system can ruin you before it pays off.
What drives it
Three things:
- Risk per trade — the single biggest lever. Risking 10% per trade makes ruin alarmingly likely; risking 1% makes it remote.
- Win rate and risk-reward — a stronger edge lowers ruin risk.
- Streaks — losses cluster. You will hit losing runs longer than you expect.
The intuition
Tie it to drawdown math: deep losses need enormous gains to recover. Risk 2% per trade and ten losses in a row costs ~18% — painful but survivable. Risk 20% and a few losses end you. Same strategy, opposite outcome — purely from sizing.
The takeaway
- Risk small and fixed — commonly 0.5–2% per trade.
- Cap daily losses in your trading plan.
- Never size up to recover — that spikes ruin risk exactly when you're vulnerable.
Your edge only matters if you survive long enough to use it. Risk of ruin is the math that keeps you in the game.
Education only — not financial advice.