Risk of Ruin Calculator
Estimate the probability that your bankroll falls below a chosen ruin threshold using Monte Carlo simulation.
What Is Risk of Ruin?
Risk of ruin is the chance that your account drops to a level where recovery becomes extremely difficult or impossible. For traders, gamblers, and even business owners, this metric matters more than “average return” because surviving long enough is what allows positive edge to play out.
A strategy can look great on paper and still fail in real life if position size is too aggressive. This is why bankroll management and drawdown control are just as important as finding a profitable setup.
How This Calculator Works
Simulation Model
This tool uses a Monte Carlo approach. Each path simulates a sequence of trades where:
- Each trade has a win probability based on your win rate.
- On a win, bankroll increases by risk per trade × average win multiple.
- On a loss, bankroll decreases by risk per trade × average loss multiple.
- If bankroll falls below your ruin threshold, that path is counted as ruined.
After thousands of random paths, the calculator reports the percentage that hit ruin. That percentage is your estimated risk of ruin for the assumptions you entered.
Why Monte Carlo Instead of a Single Formula?
Closed-form formulas are elegant but often require simplifying assumptions that don’t match real risk sizing. Monte Carlo handles compounding and path dependence better, which makes it practical for real-world planning.
How to Interpret the Results
- Estimated Risk of Ruin: The headline probability of breaching your threshold.
- Median Ending Bankroll: A “middle” outcome after your chosen number of trades.
- 10th / 90th Percentile: A quick view of downside and upside spread.
- Approximate Edge per Trade: A simple expectancy estimate in percentage terms.
If your ruin probability is too high for your comfort, the first lever to adjust is usually risk per trade. Reducing size often lowers ruin risk dramatically while preserving long-term compounding potential.
Practical Tips to Lower Risk of Ruin
1) Reduce Position Size
Cutting risk per trade from 2% to 1% can materially reduce the chance of catastrophic drawdowns. Many professionals survive by being boringly consistent with sizing.
2) Improve Payoff Quality
Even modest improvements in average win versus average loss can transform long-term outcomes. Better exits and avoiding low-quality setups often help more than chasing higher frequency.
3) Respect Losing Streaks
Streaks are inevitable even with good strategies. Model worst-case runs, then choose a risk level that lets you stay in the game during those periods.
Limitations and Assumptions
- Assumes each trade outcome is independent.
- Assumes fixed win rate and payoff profile over time.
- Does not include slippage, transaction costs, or execution errors unless you bake them into your inputs.
- Results are probabilistic estimates, not guarantees.
Use this as a planning tool, not a promise. The goal is robust risk management under uncertainty.
Bottom Line
A system with positive expectancy can still blow up if risk is oversized. Run your numbers, stress-test different assumptions, and prioritize survival. Long-term success usually belongs to those who can stay solvent long enough for their edge to compound.