Determine the mathematical probability of blowing your trading account. A must-use tool for evaluating the long-term sustainability of your strategy.
"Ruin" occurs when you lose 100% of your trading capital. Even with a 60% win rate, if you risk too much per trade (e.g. 20%), your mathematical probability of ruin is near 100% due to normal losing streaks.
The mathematical limit of risk before expectancy turns negative.
System Analysis: This is a statistically robust plan. Your risk management is well-balanced for your strategy's performance.
Risk of Ruin is a concept in gambling and trading that refers to the probability that a person will lose all their capital (reach a state of "ruin") because of a sequence of losses, even if the person has a strategy with a positive expected return.
A strategy can have a positive expectancy (meaning it makes money on average) but still have a 100% risk of ruin. This happens when the risk per trade is too large. If you risk 50% of your account per trade, you only need two losses in a row to reach 0. Even with a 90% win rate, a 2-trade losing streak will happen eventually.
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