Risk of Ruin
Risk Management
What it means
The probability that a string of losses wipes out your account completely. Higher risk per trade means a much higher chance of going to zero.
Example
Risking 50% per trade, six losses in a row (a 1.6% chance) leaves you with 1.6% of your account. Risking 1% per trade, even 20 losses in a row still leaves you with 82%.
Mistake beginners make
Beginners think a high win rate protects them. With 20% risk per trade, a perfectly normal six-loss streak destroys the account, no matter how good the strategy is.
Related terms
- Drawdown — The drop in your account value from its highest point to a later low. It measures how much…
- Position Sizing — Deciding how many shares or contracts to trade based on how much you are willing to lose, …
- Max Drawdown — The largest peak-to-trough drop your account or strategy has ever experienced. It is the w…