Glossary
Risk of Ruin
The probability that a trading account will lose enough capital to become unable to continue trading.
Risk of ruin estimates the chance of blowing up an account given win rate, payoff ratio, and position size. It is a critical concept for risk management and is often estimated using Monte Carlo simulation or the Kelly framework.
Key Points
- Higher position sizes increase risk of ruin exponentially.
- Even high-win-rate strategies can ruin accounts with poor sizing.
- Monte Carlo simulation can estimate risk of ruin under many scenarios.