GLOSSARY // Risk & Psychology
Risk of Ruin
Risk of ruin is the probability that losses drive an account down to a level it cannot recover from — either literal zero or the point where the trader can no longer size positions meaningfully. It is a function of three inputs: win rate, payoff ratio, and the fraction of equity risked per trade.
The fraction risked dominates. With any real edge, cutting risk per trade shrinks ruin probability toward zero, while raising it past a threshold makes ruin nearly certain over enough trades — even for a profitable system, because a long losing streak eventually arrives. A 50% win rate produces a 10-loss streak once every 1,024 sequences; a trader taking 1,000 trades should expect to see one.
Two traders run the same 50% win rate system through a 10-trade losing streak. Risking 2% per trade, compounding losses leave 0.98^10 = 81.7% of equity, an 18.3% drawdown — survivable. Risking 10% per trade, 0.90^10 = 34.9% remains, a 65.1% drawdown that needs a 187% gain to recover. Same system, same streak; only the sizing differs.
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Educational only — not financial advice. Definitions simplified for clarity; markets are messier than definitions.