The Risk of Ruin (RoR) is a mathematical model that can be used to calculate the chances of losing all of the account balance based on the win/loss % of a trading system and risk % used per trade.
For example, if a trader has a system that performs well with a 30% win rate, with an average profit factor of 2, and risking 2% per trade, this data can be added to the Risk of Ruin Calculator and used to develop an understanding of the overall robustness of the trading system. But the calculator can also be used to control the risk of ruin of the strategy and/or the peak-to-valley drawdown.
With this calculator traders can know the chances of blowing their trading account over time, with a particular trading strategy. This is based on the win rate percentage and the average risk percentage per trade. By entering the data of a trading system's performance stats, and with the RoR calculator above, traders can easily calculate the risk of ruin of any trading strategy.
Win rate %: In this field traders should input the overall win rate percentage of the trading system. For example, let's consider a current trading strategy that yields a 30% win rate.
Average profit/loss: In this field traders should enter the average profit earned per winning trade, divided by the average amount lost per losing trade. For our example we will use 2 as the average profit of our current strategy.
Risk per trade %: Countless times we've mention that as a rule of thumb, professional traders do not risk more than 2% of the account equity per trade. This professional methodology allows traders to stay on the markets longer and even to recoup the account equity lost with negative trades previously. So, we will use 2% as the risk per trade.
Number of trades: Very straight forward. If traders are testing a trading strategy and want to know how it will perform based on a number of future trades, then it's only required to input the expected number of trades. It can be 30 daily trades, 15 weekly trades and so on.
If traders are testing a current trading strategy and want to know how it's performing and it's risk of ruin percentage, then just input the total number of trades taken so far. For this example, we will input 50 as the total number of trades for our current trading strategy.
Max drawdown %: In this field traders must input the maximal drawdown percentage reached (with a current trading strategy), or the expected maximal percentage if testing a new strategy. For our example, we will input a 30% maximal drawdown reached with our current trading strategy.
Next, we hit the "Calculate" button.
The results: The first result is the Risk of peak-to-valley drawdown percentage, in our case 21.1%. Peak-to-valley drawdown definition is the largest cumulative percentage decline in portfolio value from a previous equity high. It is defined as the percentage decline from the trading account highest value (peak) to the lowest value (valley) after the peak. It can also be interpreted that, on our example, our trading strategy is showing a 21.1% probability of reaching 30% drawdown from an equity high to a subsequent equity low.
The second result of the calculator is the risk of ruin percentage of our trading strategy, in this case 13.7%- This means that our trading strategy is showing a 13.7% probability of reaching 30% drawdown of the starting equity amount.
Please note that the output of the Risk of Ruin Calculator can vary, because it is based on a simulation of 100,000 iterations.