Risk of Ruin
Risk of ruin is the probability that an account will fall to a defined ruin threshold before growing, given a strategy's edge, win rate and the fraction of capital risked per trade.
Risk of ruin is the probability an account falls to a stopping-point loss before its edge compounds. It descends from gambler's ruin — (q/p)ᴺ for even-money bets — and the exponent N is capital in bet units, which is why halving the risk fraction slashes ruin probability exponentially rather than linearly. Even a genuine edge carries serious ruin if the bet size is too large, and correlated positions inflate the effective bet. Systems enforce the threshold with heat caps, circuit breakers and kill switches; the concept's canonical home, with the formula and Monte Carlo method, is on RiskManagementGyan, the network's risk authority.
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Risk of ruin
Canonical explainer on RiskManagementGyan.
Risk per trade
Canonical explainer on RiskManagementGyan.
Maximum drawdown
Canonical explainer on RiskManagementGyan.
Related on AlgoTradeGyan: Risk per Trade · Maximum Drawdown · Position Sizing · Portfolio Heat · Kill Switch Design
Published 10 July 2026 · Updated 17 July 2026. This page is a summary; the canonical, maintained treatment of Risk of ruin lives on RiskManagementGyan. Educational content only — not investment advice.