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Risk of Ruin
Risk ManagementThe probability of losing enough trading capital to make recovery practically impossible. Determined by win rate, risk per trade, and payoff ratio. Keeping risk per trade small (1-2%) dramatically reduces ruin probability.
Related Terms
Position Sizing
Determining how many shares or contracts to trade based on account size and risk per trade.
Kelly Criterion
A mathematical formula for calculating the optimal fraction of capital to risk per trade based on win rate and payoff ratio.
Drawdown
The peak-to-trough decline in an account or portfolio value, typically expressed as a percentage.
Monte Carlo Simulation
A statistical method that runs thousands of randomized trade sequences to model the range of possible portfolio outcomes.