Risk of Ruin Calculator

Risk of Ruin Calculator

Managing risk is the cornerstone of long-term trading success, and understanding your probability of ruin is one of the most important steps in protecting your capital. The Risk of Ruin Calculator on Traders MBA is a free tool designed to help traders estimate the likelihood of depleting their account under specific trading conditions. By entering your balance, risk per trade, win rate, and reward-to-risk ratio, you can quickly assess how close you are to hitting your defined drawdown threshold.

This calculator is particularly valuable for active traders who want to stress-test their strategy and avoid the common pitfall of underestimating downside risk. It not only shows the probability of ruin but also highlights critical metrics such as the number of losses to reach your drawdown, break-even win rate, Kelly criterion, and expectancy per trade. With these insights, you can make better informed decisions, refine your money management, and approach the markets with confidence.

How to Use the Risk of Ruin Calculator

1. Enter Your Starting Balance (optional)

• This is your initial account size (e.g., £10,000).
• It is used only for context in calculating drawdown levels (e.g., equity floor).
• It does not change the actual probability of ruin calculation, which depends instead on your win rate, risk, and reward-to-risk ratio.

2. Input the Number of Trades

• This defines how many trades you want the calculator to simulate (e.g., 100 trades).
• A higher number gives you a long-term outlook on the sustainability of your trading system.
• The probability of ruin is calculated over this horizon, not indefinitely.

3. Enter Risk per Trade (%)

• This is the fraction of your equity you risk on each trade (e.g., 1%, 2%, 5%).
• It represents how much you stand to lose if the trade hits your stop loss.
• The higher this number, the greater the probability of ruin.

4. Set the Reward-to-Risk Ratio (R)

• Defines the average size of a win relative to the risk.
• Example: R = 2.0 means you aim to make £200 when risking £100.
• This determines your expected payoff per trade.

5. Input Your Win Rate (%)

• The percentage of trades you expect to win (e.g., 50%).
• Critical for expectancy: higher win rates reduce ruin risk, while lower win rates magnify it.
• Combined with R, this defines whether your edge is positive or negative.

6. Set the Ruin Threshold (% Drawdown)

• The drawdown level at which you consider your account “ruined” (e.g., 50%).
• Example: On a £10,000 account, a 50% threshold = £5,000 equity floor.
• 100% means complete wipe-out; smaller values (e.g., 30–50%) are more practical for risk control.

Understanding The Outputs

1. Risk of Ruin (at chosen trades)

• Probability of hitting your ruin threshold within the set number of trades.
• Expressed as a percentage (e.g., 0.27%).

2. Losses to Threshold

• How many consecutive losing trades it would take to hit your defined ruin level.
• Useful for stress-testing the impact of losing streaks.

3. Equity Floor (of start)

• The account value (in %) where ruin occurs.
• Example: 50% means ruin is defined as losing half your starting equity.

4. Break-Even Win Rate

• The minimum win rate you need (given your R) to avoid long-term losses.
• Example: With R = 2.0, your break-even win rate is 33.3%.

5. Kelly (Theoretical)

• The optimal percentage of equity to risk per trade to maximise growth (in theory).
• Example: 25% Kelly suggests high growth but also extreme volatility — traders usually apply a fraction (e.g., half-Kelly).

6. Per-Trade Edge (Linear)

• The arithmetic expectancy of each trade as a percentage.
• Example: 2.5% means on average you gain 2.5% per trade before compounding.

7. Geometric Expectancy / Trade

• The compounded growth factor per trade.
• Example: 1.022 means equity grows on average 2.2% per trade compounded.

8. Ruin @ Half the Trades

• Probability of ruin if only half your chosen trade horizon is completed.
• Useful for assessing shorter timeframes.

9. Trades for 50% Ruin (est.)

• Estimated number of trades before you have a 50% chance of hitting ruin.
• If “—”, it means ruin probability remains low even over extended trades.

Disclaimer

This calculator is provided for educational purposes only. It does not constitute financial advice. To the maximum extent permitted under UK law, Traders MBA and its contributors accept no liability for any losses, costs, or damages arising from use of this tool. Always verify results with your broker and conduct your own due diligence.

Frequently Asked Questions

Before using the Risk of Ruin Calculator, many traders have questions about what the tool does and how to interpret the results. This FAQ section addresses the most common queries, ensuring you fully understand how to use the calculator effectively. Whether you’re a beginner testing your first strategy or an experienced trader stress-testing your edge, the answers below will help you make the most of this free tool.

By reviewing these FAQs, you’ll know how to input your data, interpret the results, and apply the insights to your own trading plan with confidence.

1. What is the Risk of Ruin Calculator?

The Risk of Ruin Calculator estimates the probability that your trading account will reach a predefined drawdown level (the “ruin threshold”) based on your win rate, reward-to-risk ratio, risk per trade, and number of trades.

2. Why is the ruin threshold important?

The ruin threshold is the equity level at which you consider your account unusable. For example, if you set it at 50%, the calculator measures the probability of your account falling by half. This allows traders to define “ruin” realistically, rather than only considering complete account wipe-out.

3. Does the starting balance change the ruin probability?

No. The starting balance is only used for context (e.g., calculating the equity floor in £ or %). The ruin probability depends on your win rate, R multiple, risk per trade, and trade count — not the nominal account size.

4. What does ‘Risk per trade (%)’ mean?

This is the portion of your account you risk on each trade, usually based on a stop-loss level. For example, if your account is £10,000 and you risk 2% per trade, your maximum loss per trade is £200.

5. How does Reward-to-Risk Ratio (R) affect ruin?

A higher R means your average wins are larger relative to your losses. This reduces the break-even win rate and lowers the probability of ruin, provided you can achieve the expected win rate.

6. What is the difference between linear expectancy and geometric expectancy?

Linear expectancy is the simple arithmetic average gain per trade. Geometric expectancy accounts for compounding effects, which is a more accurate measure of long-term growth potential in trading.

7. What does the Kelly percentage mean?

The Kelly formula suggests the theoretical optimal fraction of equity to risk per trade to maximise growth. However, it assumes perfect knowledge and no variance. Traders often use a smaller fraction of Kelly (e.g., half or quarter) to reduce volatility.

8. How is ‘Losses to threshold’ useful?

It shows how many consecutive losing trades it would take to hit your ruin threshold. This helps you understand whether your risk management can survive extended losing streaks.

9. What is ‘Trades for 50% ruin (est.)’?

This shows the estimated number of trades before there’s a 50% chance of reaching your ruin threshold. If it’s blank (—), it means ruin probability is low even over a large number of trades.

10. Can the calculator guarantee I won’t blow my account?

No. The calculator provides a statistical model based on your inputs. Real markets involve slippage, changing volatility, psychological mistakes, and fat-tail risks. Always use risk management and do not rely solely on calculators for trading decisions.