What is risk of ruin in trading?

Risk of ruin is the probability that a run of losses takes an account down to a level you have defined as ruin, such as 20% below the starting balance, given an assumed win rate, payoff and risk per trade. It is a model, not a forecast: it assumes every trade is independent and that the win rate and payoff stay the same.

What goes into it

• The share of trades that win. An assumption, usually taken from a backtest or a trading record.
• The payoff: the average win divided by the average loss, which is the realised risk-reward ratio.
• The risk per trade, as a percentage of the balance.
• The ruin line: how far down counts as ruin.
• The number of trades, or an unlimited run.

The first two decide the edge, the expected result per trade. The third decides how fast a losing run turns into a drawdown: at 1% of the current balance per trade, 23 losses in a row reach 20% down; at 3%, 8 do.

A worked example

Three things stand out. Going from 1% to 2% per trade multiplies the risk of ruin in the first column almost ninefold. A thin edge offers little protection: at 35% winners and 1% risk, more than one run in four hits the line. And with a negative edge, a smaller size only buys time: at 0.5% per trade, 70.7% of runs still reach the line.

Why real numbers are worse

The model is kinder than markets are:

• Losses cluster. Trades are not independent. A news day or a change in the market can produce a run of losses at once, and three open trades against the US dollar behave like one large trade.
• The win rate is an estimate. A backtest can fit the past too well; see overfitting.
• Costs cut the edge. In the risk-reward ratio example, 2 pips of cost turn a 2.0R setup into 1.78R, with a breakeven of 36.0%. At that payoff, the 35% column is no longer positive.
• Stops slip. A “1%” loss can be larger after a gap; see stop loss.

Where you see it in MT5

MetaTrader 5 does not compute a risk of ruin. It gives you the inputs from your own history: View → Reports, then the Risks section, lists Avg. Profit and Avg. Loss (MT5 help). The drawdown calculator works out how many losses in a row reach a limit, and the odds of a losing streak for a loss rate you assume.

The common mistake

Picking the risk per trade from the hoped-for return instead of from the loss you can survive. The table shows the same hypothetical strategy with a 1.5% or a 26.6% chance of ruin, depending only on size. The other is defining ruin as a zero balance when a nearer line applies, such as a prop firm’s maximum loss; see prop-firm daily drawdown.

Risk of ruin and PipWarden

PipWarden sizes every trade from your risk per trade: 1% of equity by default, and the setting cannot go above 5%. Your daily loss limit, 5% by default, is checked before every order; once the day’s loss reaches it, no new trades open until the next UTC day. It stops new trades, not open ones, so a day can end past the limit. The bot has no overall drawdown stop, so an account-wide line, such as a prop firm’s maximum loss, is yours to track. See the features page and how to set a daily loss limit.