What risk of ruin means
Risk of ruin is the probability that a trading account falls to a set loss level before it recovers. It depends on three things: how often you win, how much you win compared with what you risk (reward-to-risk), and how much of the account you risk per trade. Even a profitable system can hit ruin if each loss is large enough or the losing streaks run long enough.
Expectancy per trade, in R units, is win rate × reward:risk − loss rate. A 50% win rate at 1R reward gives 0.5 × 1 − 0.5 = 0.00R, so over time the account is flat before costs. Positive expectancy is necessary but not enough: the path matters, and the drawdown limit can be hit on the way.
Why prop firm drawdowns make it critical
A prop firm evaluation usually has a maximum drawdown, often 8–10% of the account. Crossing it ends the attempt, even if the trader would have recovered later. That makes the probability of hitting a fixed limit, within a set number of trades, the number that matters. A strategy that is profitable over a year can still fail an evaluation with a high probability if the risk per trade is large relative to the limit.
Worked example
Take a 50% win rate, 1:1 reward:risk, 1% risk per trade and a 10% drawdown limit over 500 trades. Expectancy is 0.00R, so the expected drift is zero. Equity follows a random walk with steps of ±1%, and random walks of this length cross a 10% floor often. The simulation reports a ruin probability well above 20%, even though the strategy breaks even on average.
Now take a 60% win rate, 2:1 reward:risk and 0.5% risk per trade, with the same 10% limit. Expectancy is 0.6 × 2 − 0.4 = 0.80R per trade. The drift is strongly positive and the per-trade loss is small, so the ruin probability falls well below 1%. The two strategies differ in edge and in size, and the calculator shows how much each matters.
Common mistakes
- Using a win rate from a small sample. Ten or twenty trades can say almost nothing about a system's true win rate.
- Ignoring the path. Average return can be positive while the drawdown limit is still hit early in many runs.
- Risking a fixed percentage on an account that is already down. Each loss reduces equity, so the same percentage risks less in dollars but moves you closer to the limit.
- Treating the simulation as a forecast. It assumes independent trades with fixed win rate and reward. Real results have clustering, regime changes and costs that the model does not include.
Using the calculator
Enter your win rate and reward:risk from at least several hundred trades, use the risk per trade you plan to trade, and set the drawdown limit from your firm's rules. Raise the simulations for a steadier estimate. The same inputs always return the same figure, so you can compare two settings directly. Lower the risk per trade until the probability of ruin is acceptable for your goal.
Frequently asked questions
What is a risk of ruin calculator?
It estimates how often a trading account hits a set loss limit over a series of trades, using a random simulation based on win rate, reward:risk and risk per trade.
Why is the result random?
Each simulated path draws random wins and losses. The calculator uses a fixed seed, so the same inputs always give the same result. Changing the simulation count changes the estimate slightly.
What is a good risk of ruin?
There is no universal number. For prop firm evaluations many traders aim for a low probability over the number of trades they expect to take, but the right threshold depends on your goals and rules.
Is this financial advice?
No. This is an educational simulation. Real trading results depend on costs, slippage and market conditions the model does not capture.