Risk of Ruin Calculator: Worked Examples for Forex Traders

A risk of ruin calculator tells you the chance that your account falls to a level you cannot accept, given your win rate, your reward-to-risk and how much you risk per trade. Most traders skip it because the maths looks dry. This article walks through the numbers by hand, so the result from our calculator makes sense when you use it.

What "ruin" means for a trader

In the textbook sense, risk of ruin is the chance of losing all your capital. Probability textbooks treat it as the classic "gambler's ruin" problem, for example William Feller's An Introduction to Probability Theory and Its Applications, Vol. 1 (Wiley), in the chapter on random walks and ruin problems. For a working trader, ruin usually comes much earlier than zero.

Two common examples:

• A prop-firm challenge: ruin is the maximum loss rule. On the FTMO 2-Step, for example, the maximum loss is 10% of the starting capital (other FTMO account types use a trailing limit), and there is a separate daily limit (FTMO trading objectives).
• A personal account: ruin is the drawdown where you would stop trading, change everything, or lose your nerve. For example, 20% or 30%. Pick your own number.

So the first input for any risk of ruin calculation is your own limit. Write it down before you look at anything else.

The three numbers that drive risk of ruin

1. Win rate. The share of trades that win, from your journal. Use a large sample.
2. Reward-to-risk. How many R an average winner makes, where 1R is the amount you risk per trade. If you risk $100 and your average winner makes $200, that is 2R.
3. Risk per trade. The percentage of the account you lose when the stop is hit.

The first two describe your strategy. The third is a choice you make every day. That is good news, because it is the one you control completely.

Step one: how long can a losing streak be?

Before any formula, look at losing streaks. They are what actually take accounts down.

Say your win rate is 45%, so 55% of trades lose. The chance that the next trade loses is 0.55. The chance that the next 8 trades all lose is 0.55 multiplied by itself 8 times:

• 0.55^8 ≈ 0.0084, or about 0.84%

That looks rare. But you do not take 8 trades. Over 500 trades there are hundreds of places where such a streak could start. A rough count: the expected number of streaks of 8 or more losses in 500 trades is about 500 × 0.45 × 0.0084 ≈ 1.9. In plain words, at a 45% win rate you should expect about two streaks of 8 losses or more in 500 trades.

Step two: what that streak does to your account

Now see what 8 losses in a row cost at different risk levels. Each loss takes the stated percentage from the current balance.

The last column matters. A 33.7% drawdown needs a 50.7% gain just to get back to where you started. Losses and recoveries are not equal. Our drawdown recovery calculator shows this for any number.

At 1% risk, a normal bad streak is unpleasant. At 5% risk, the same streak costs a third of the account, and on a prop-firm challenge with a 10% maximum loss it ends the account by the third loss.

Step three: a full risk of ruin calculation with worked numbers

Streaks show the danger. A risk of ruin calculator puts it into one number. Here is a simple version you can follow by hand.

The setup

• Win rate: 40%
• Average winner: 2R, average loser: 1R
• Risk per trade: a fixed dollar amount based on the starting balance
• Ruin: losing a set number of R

First, check the edge. Expectancy per trade is (0.40 × 2) − (0.60 × 1) = +0.20R. On average, each trade adds a fifth of your risk. That is a positive edge, before costs.

The formula for this case

When each trade either wins 2R or loses 1R, the chance of ever losing N units of R is z^N. Here z is the number between 0 and 1 that solves:

p × z³ − z + q = 0

where p is the win rate (0.40) and q is the loss rate (0.60). For these numbers, z ≈ 0.823. You do not need to solve this yourself; a calculator does it. What matters is what happens when you change N.

What N means

N is your ruin level divided by your risk per trade. With a 10% limit:

• At 2% risk, N = 10 ÷ 2 = 5 losses
• At 1% risk, N = 10 ÷ 1 = 10 losses
• At 0.5% risk, N = 10 ÷ 0.5 = 20 losses

The results

This is a strategy with a real positive edge. At 2% risk per trade, it still has about a 38% chance of hitting a 10% drawdown at some point. Halve the risk to 1% and the chance falls to about 14%. Halve it again and it falls to about 2%. These are chances over an unlimited number of trades, not per month.

Same win rate. Same reward-to-risk. Only the lot size changed.

Now take the same strategy on a personal account where ruin means a 50% drawdown. At 5% risk, N = 10, so the risk of ruin is again about 14%. At 1% risk, N = 50, and the risk of ruin is under 0.01%.

What this simple model leaves out

Be honest about the limits of any calculation like this:

• Real winners and losers are not exactly 2R and 1R.
• It ignores costs. Spread and commission reduce the edge.
• It assumes your win rate is the true one. A win rate from a small sample can be badly wrong.
• It assumes trades are independent. If you trade worse after losses, the real risk is higher.
• Slippage and weekend gaps can make one loss bigger than 1R.

Treat the result as a warning light, not a promise.

What happens with no edge

If your expectancy is zero or negative, the maths is harsh. With a win rate of 50% and 1R winners and 1R losers, there is no edge. Over enough trades, the chance of eventually hitting any fixed limit moves towards 100%. Costs push a zero-edge strategy below zero.

Smaller risk only slows this down. It cannot fix a strategy with no edge. Regulators show how common losing is for retail traders: when ESMA restricted CFDs in 2018, it reported that national regulators found 74-89% of retail CFD accounts typically lose money (ESMA, 2018).

How to use a risk of ruin calculator well

1. Set your ruin level first. For a prop challenge, use the firm's maximum loss, and keep the daily limit in mind too.
2. Use win rate and reward-to-risk from your journal. At least 100 trades with the same rules, if you have them.
3. Run a pessimistic version. Take 5 points off your win rate and see how the result changes.
4. Change only risk per trade. Find the level where the risk of ruin is a number you can live with.
5. Write that risk down and size every trade from it. Our position size calculator turns a risk % and a stop loss into a lot size.

Quick checklist

• My ruin level: ___% drawdown.
• My win rate (from ___ trades): ___%.
• My average reward-to-risk: ___R.
• My risk per trade: ___%, which means ___ losses fit before ruin.
• I checked a pessimistic win rate.
• I size every trade from this risk, with no exceptions after losses.

That last point is where many plans break down. The risk of ruin is low on paper, then a trader doubles the lot after three losses. Research on the break-even effect shows how being behind can make extra risk feel attractive (Thaler and Johnson, 1990). If that pattern sounds familiar, read about revenge trading and why losses feel so heavy in loss aversion in trading. A daily loss limit adds a second layer of protection. Too many trades also push your real risk up, which we cover in how to stop overtrading forex.

Summary

Risk of ruin is not a mystery number. It comes down to how many losses fit between your balance and your limit. Your win rate and reward-to-risk set the odds of a long streak. Your risk per trade decides how long a streak you can survive. Put your own numbers into our free risk of ruin calculator and see where your current risk puts you.

Discipline Guard can put your chosen risk on the MT4 chart: it sizes each lot from your stop loss and risk %, and caps your total open risk.