Win rate, payoff ratio and risk per trade combine into a probability of blowing up. Here is how to think about it.
Key takeaways
- Risk of ruin rises sharply as risk per trade increases.
- A positive expectancy strategy can still ruin an account through size.
- Keeping risk per trade under about 1% keeps ruin probability negligible for most edges.
Risk of ruin is the probability that a sequence of normal losses reduces your account below a level from which recovery is impractical. It depends on three inputs: win rate, average win to average loss, and the fraction of capital risked per trade.
The third input dominates. A strategy with a genuine edge risking 1% per trade has a negligible chance of ruin over any reasonable horizon. The same strategy risking 10% per trade can be wiped out by a streak that occurs several times a year.
This is why professionals appear conservative. They are not less confident in their edge; they are more respectful of the sequence in which it arrives.
Run the numbers once, honestly, using your actual journal statistics rather than hoped-for ones. If the answer is uncomfortable, the fix is one variable — size — and it is entirely under your control.
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