The risk of ruin calculator is an advanced tool to evaluate a trading system’s probability of loss.
By inputting the system’s metrics, you can calculate the probability to hit a specific drawdown or ruin
What’s the difference between risk of ruin and risk of drawdown?
Risk of ruin is defined as a probability of a specific loss from the original balance, ie if you started with $1000, calculating a risk of ruin of 40% would tell you the probability to lose 40% of your balance or $400. As the equity grows, the risk of ruin decreases.
Risk of Drawdown is always the same through the lifetime of your account since your account’s peak is always increased once the equity grows (drawdown is the calculation of highest peak-to-valley decrease).
How to calculate risk of ruin?
Enter the system’s metrics:
Win rate (%) – how many of the trades end up in profit, in percentage.
Average win – average winning trade, in money terms.
Average loss – average losing trade, in money terms.
Risk per Trade (%) – what is the risk taken per each trade, in percentage.
Loss Level (%) – the loss level for which you would like to calculate risk of ruin and risk of drawdown.
Number of trades – the number of trades the calculation will test. The higher the number of trades, the higher the chance for drawdown and ruin.
How to read the results?
For example, if we were to test the following scenario of:
A win rate of 50% and win/loss ratio of 1.5 testing against a loss level of 50% over the period of 100 trades with a risk of 5% per trade would give the probability of roughly 4.43% risk of ruin and about 6.9% risk of drawdown.
Why the results of risk of drawdown change?
To calculate the risk of drawdown, the calculator uses the monte-carlo simulation over 1000 iterations to create different models using a random set of data for available inputs.