Risk of Ruin Calculator

A Risk of Ruin calculator is a tool that helps traders or investors assess the probability of losing their entire capital (or going “bust”) based on their trading strategy. It is particularly useful for managing risk and capital allocation.

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risk-of-ruin-calculator

What is the Risk of Ruin Calculator?

The Risk of Ruin calculator is a handy tool for managing risk in forex trading. It helps you determine the probability of losing a certain percentage of your trading capital. To use it, you’ll need to input a few key variables:

  1. Account Size: The total amount of money in your trading account.
  2. Risk per Trade (%): The percentage of your trading capital you’re willing to risk on a single trade.
  3. Winning Percentage (%): Your historical or expected win rate.

The formula for Risk of Ruin involves complex statistical calculations, but the idea is to assess the likelihood of losing a specific percentage of your account based on your win rate and risk per trade.

If you provide these values in the fields above, our tool can help you with the calculations.

The Risk of Ruin calculation typically involves several variables, including:

  1. Initial Capital (C0): The amount of money you begin with.
  2. Trade Size (B): The size of each trade as a percentage of your initial capital.
  3. Win Rate (W): The probability of winning on each trade, typically expressed as a percentage.
  4. Loss Rate (L): The probability of losing on each trade, which is equal to 100% – Win Rate.
  5. Number of Bets or Trades (N): The total number of trades you plan to make.

The formula to calculate the Risk of Ruin is as follows:

Risk of Ruin = [((1 – (B/W))^N) – 1] / [(B/W) – 1]

This formula calculates the likelihood of losing your entire capital after N trades.

Here’s a step-by-step explanation of how to use a Risk of Ruin calculator:

  1. Input your Initial Capital (C0).
  2. Input the Trade Size as a percentage of your capital (B).
  3. Input your Win Rate (W) as a percentage.
  4. Calculate the Loss Rate (L) as 100% – Win Rate.
  5. Input the Number of Trades (N) you plan to make.

The calculator will then provide you with the Risk of Ruin percentage. This percentage indicates the likelihood of losing all your initial capital based on your inputs.

It’s important to note that the Risk of Ruin calculation is a simplification and doesn’t take into account other factors like transaction costs, slippage, or changing market conditions. It’s a useful tool for understanding the risks associated with your trading strategy, but it should be used in conjunction with other risk management techniques and considerations.

Make sure to use accurate and realistic values for your inputs to get a meaningful estimate of your risk.

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