Understanding Risk of Ruin

What risk of ruin describes

Risk of ruin is the estimated probability that a trading strategy, given its win rate and how much is risked per trade, eventually depletes an account entirely, assuming the strategy's statistics hold and sizing stays constant.

Why position sizing drives this so heavily

Even a strategy with a genuine, positive long-run edge can carry a meaningful risk of ruin if too much is risked on each individual trade, since a losing streak — which will eventually occur, even in a good strategy — can deplete an oversized account before the long-run edge has a chance to play out.

General implications

• Reducing the percentage risked per trade generally reduces risk of ruin, often substantially.
• A strategy with a weak or negative edge can have a high risk of ruin regardless of position sizing.
• This concept is a strong argument for disciplined, conservative position sizing, independent of how confident you are in any single trade.

What to remember

• Risk of ruin estimates the probability of eventually depleting an account, given win rate and sizing.
• Position sizing has an outsized effect on risk of ruin, even for a strategy with a real edge.
• A losing streak is a statistical certainty eventually — sizing determines whether it's survivable.
• This is general education, not a guarantee about any specific strategy's real-world outcome.