# Risk of Ruin > Risk of ruin is the chance that losses drain your account beyond recovery. Learn what drives it, see simulated numbers and how to keep it low. Source: https://learn.tradelabsai.com/risk/risk-of-ruin/ Track: Risk Management · Level: Intermediate · Updated: 2026-10-03 Publisher: TradeLabs AI (https://tradelabsai.com). Education, not financial advice. Cite as: TradeLabs Learn, "Risk of Ruin", https://learn.tradelabsai.com/risk/risk-of-ruin/ Risk of ruin is the probability that a trader loses enough of their account to be effectively out of the game, either losing everything or falling below a level they cannot recover from. It depends on three things: your edge (expectancy), how variable your results are, and how much you risk per trade. The striking lesson from risk of ruin is that even a profitable strategy can wipe out an account if each trade risks too much. ## What drives risk of ruin | Factor | Effect | |---|---| | Positive expectancy | Lowers risk of ruin; negative expectancy guarantees ruin eventually | | Higher win rate | Fewer long losing streaks, lower risk | | Larger risk per trade | Sharply increases risk of ruin | | Lower ruin threshold | Defining "ruin" as a 30% loss instead of 100% makes it more likely | | More trades | More chances for a bad streak, unless the edge is strong | Of these, risk per trade is the one you control directly every day. ## A simulation The table below comes from a Monte Carlo simulation we ran of a strategy that wins 45% of the time, with wins of 1.5R and losses of 1R. Its expectancy is a positive +0.125R per trade. Each simulated trader took 500 trades, risking a fixed percentage of their current account each time. "Ruin" here means a 50% drawdown from the starting balance. | Risk per trade | Chance of a 50% drawdown within 500 trades | |---|---| | 1% | Close to 0% | | 2% | About 0.6% | | 5% | About 18% | | 10% | About 57% | The same profitable strategy goes from almost no chance of a disastrous drawdown at 1% risk to worse than a coin flip at 10% risk. Nothing about the strategy changed; only the size of each bet. See [Monte Carlo Simulation](https://learn.tradelabsai.com/research/monte-carlo-simulation/). **Example: Why size matters so much** At 10% risk, seven losses in a row cut the account by about 52%. With a 55% loss rate, a run of seven losses is not rare over hundreds of trades. At 1% risk, the same seven losses cost about 7%, an uncomfortable week rather than the end of the account. ## Ruin is often psychological before it is financial Many traders quit, or abandon their plan, long before reaching zero. A 30% or 40% drawdown is enough for most people to stop following their rules, start revenge trading or give up. For practical purposes, define ruin as the drawdown at which you would stop trading the strategy, and size to make that very unlikely. See [Maximum Drawdown](https://learn.tradelabsai.com/portfolio/maximum-drawdown/) and [Revenge Trading](https://learn.tradelabsai.com/psychology/revenge-trading/). ## How to keep risk of ruin low 1. **Have a positive expectancy after costs.** Without an edge, ruin is only a matter of time. See [Expectancy](https://learn.tradelabsai.com/risk/expectancy/). 2. **Risk a small percentage per trade,** usually 0.5% to 2%. See [Position Sizing](https://learn.tradelabsai.com/risk/position-sizing/). 3. **Use fixed percentage sizing,** so position size shrinks during drawdowns. See [Fixed Percentage vs Fixed Dollar Risk](https://learn.tradelabsai.com/risk/fixed-percentage-risk/). 4. **Limit correlated exposure,** since correlated losses act like one larger bet. See [Portfolio Heat](https://learn.tradelabsai.com/risk/portfolio-heat/). 5. **Never bet more than the Kelly fraction;** ideally use a fraction of it. See [Fractional Kelly](https://learn.tradelabsai.com/risk/fractional-kelly/). 6. **Simulate your own strategy** with your actual win rate and payoff to see the range of drawdowns you might face. ## Classic formulas and their limits Simple risk of ruin formulas exist for fixed bet games, such as the gambler's ruin problem, and approximations for trading based on win rate, payoff ratio and units of capital. They are useful for intuition but assume fixed bet sizes and independent trades. Simulation with your own trade results is usually more realistic. See [Monte Carlo Simulation](https://learn.tradelabsai.com/research/monte-carlo-simulation/). ## Common mistakes - **Assuming a profitable strategy cannot ruin you.** - **Sizing up after a winning streak,** right before an inevitable losing streak. - **Defining ruin as zero** when the real breaking point is much earlier. ## Frequently asked questions ### What is risk of ruin in trading? The probability of losing enough capital to be unable to continue trading, either everything or a set drawdown level. ### Can a profitable strategy still blow up an account? Yes. With too much risk per trade, normal losing streaks can cause catastrophic drawdowns even when the strategy has a positive edge. ### How much should I risk to avoid ruin? Most traders keep risk per trade between 0.5% and 2%. Simulating your own strategy's results gives a more precise answer. Next, learn how long streaks can get in [Losing and Winning Streaks](https://learn.tradelabsai.com/risk/losing-and-winning-streaks/). ## Continue learning - Next lesson: [Losing and Winning Streaks](https://learn.tradelabsai.com/risk/losing-and-winning-streaks/) - Previous lesson: [Expectancy](https://learn.tradelabsai.com/risk/expectancy/) - Related: [Expectancy](https://learn.tradelabsai.com/risk/expectancy/): Expectancy is the average amount you win or lose per trade. Learn the formula, how win rate and payoff combine, expectancy in R and how to improve it. - Related: [Position Sizing](https://learn.tradelabsai.com/risk/position-sizing/): Position sizing decides how many shares or contracts to trade so each loss stays small. Learn the formula, worked examples for each market and common mistakes. - Related: [Losing and Winning Streaks](https://learn.tradelabsai.com/risk/losing-and-winning-streaks/): Losing streaks are a normal part of any strategy. See how long streaks get at different win rates, why they happen and how to handle them without breaking rules. - Related: [Kelly Criterion](https://learn.tradelabsai.com/risk/kelly-criterion/): The Kelly criterion finds the bet size that maximises long term growth given your edge. Learn the formula, worked examples and why most traders use less. - Related: [Maximum Drawdown](https://learn.tradelabsai.com/portfolio/maximum-drawdown/): Maximum drawdown measures the largest fall from a peak to a trough in an account or strategy. Learn how to calculate it, recovery maths, duration and how to use it. - Related: [Monte Carlo Simulation](https://learn.tradelabsai.com/research/monte-carlo-simulation/): Monte Carlo simulation generates thousands of possible outcomes to show the range of results. Learn trade resampling, drawdown estimates and the limits.