Mason David442 Baker

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What is risk of ruin and how do you calculate it?

Risk of ruin measures the probability that a trader loses so much capital that recovery is statistically impossible. It depends on win rate, payoff ratio, and risk per trade. Example: with 40% win rate, 1:1 payoff, and 5% risk per trade, ruin probability is extremely high. At 1% risk per trade, it drops dramatically. Institutions run ruin models to set exposure caps. Retail traders should calculate their own worst-case outcomes—tools exist online, or use Monte Carlo simulations. The lesson: even with an edge, risking too much guarantees ruin. Risk of ruin emphasizes survival—your first job in forex is not to maximize profits, but to avoid elimination.