Risk of Ruin

Risk of Ruin - The probability that a trading strategy will lose so much capital that it cannot recover or continue trading. In other words, it’s the chance of the account blowing up. Risk of ruin calculations account for factors like win probability, payout ratio, and leverage. A high risk of ruin means there’s a significant chance the strategy will eventually hit a run of losses that wipes out capital. In backtesting, one looks to keep the risk of ruin as low as possible (ideally near 0%) by employing proper risk management. Even profitable strategies can have a non-zero risk of ruin if they trade too large or encounter a severe drawdown without protective measures.