What it is
The risk of ruin calculator estimates the statistical probability that your trading strategy will wipe out a specified portion of your account over a run of trades, based on your win rate, reward-to-risk ratio, and risk percentage per trade.
Why it matters
Even a profitable strategy can experience a sequence of consecutive losses due to random market variance. If your position sizing is too aggressive, a standard losing streak can destroy your account before the edge plays out.
Running a simulation helps you visualize worst-case scenarios and forces you to scale down risk to ensure long-term survival.
Why traders use it
Traders use this before committing capital to a new system, adjusting their risk-per-trade input until the probability of ruin drops to an acceptable level close to zero.
How important is it?
It bridges the gap between theoretical profitability and practical survival. A strategy with high edge can still fail if leveraged incorrectly.
Worked example
With the default settings: a 45% win rate, a 2:1 reward-to-risk ratio, risking 2% per trade over 200 trades, testing for a 50% account loss, the simulation runs 2,000 Monte Carlo sequences to estimate your statistical odds and median ending balance.
Common mistakes
- Assuming past backtest results guarantee future performance without accounting for variance.
- Risking too high a percentage of capital per trade, which exponentially increases the risk of ruin.
- Ignoring transaction costs, spreads, and slippage in actual execution.
Frequently asked questions
Can risk of ruin ever be zero?
Mathematically, as long as you risk a positive amount on any trade, there is a tiny non-zero probability of a catastrophic losing streak, but keeping risk at 0.5% to 1% per trade brings it to 0.0% in practical simulations.
How do I calculate the probability of failing a 10% prop firm drawdown?
Set the "Loss that counts as ruin (%)" field to 10% (or your firm's max drawdown limit) and enter your risk per trade. If the chance of losing 10% is above 1%, lower your risk per trade to 0.5% or 0.25%.
How many trades should I simulate in the Monte Carlo test?
Testing over 100 to 500 trades gives a realistic view of medium-term variance and consecutive losing streaks.
Related trading guides
What Is Drawdown and Why Recovery Gets Harder
See how a trading drawdown is measured, why the gain needed to recover grows faster than the loss, and how to limit deep drawdowns.
Risk-Reward Ratio Explained With Examples
Understand the risk-reward ratio, the win rate you need to break even, and why a good ratio alone does not make a good trade.
How to Calculate Position Size, Step by Step
A simple four-step method to work out your lot size from your account balance, risk percentage and stop loss, with worked examples.
This page is for education only and is not financial advice. See our disclaimer.