Risk of ruin answers the question every prop trader should ask first: given my strategy statistics and the account’s drawdown limit, what is the probability the account dies before it pays? It converts gut feel into a number you can refuse.
Risk of ruin calculator
Classic fixed-stakes approximation. It assumes constant risk size and independent trades, which makes it optimistic in real markets where losses cluster.
The formula behind it
Edge (per unit risked) = win rate × RR − loss rate. Units of cushion = drawdown limit ÷ risk per trade. Risk of ruin ≈ ((1 − edge) ÷ (1 + edge))units. Doubling your cushion (halving risk per trade) raises the exponent and collapses the risk of ruin far faster than improving win rate by a few points.
Worked example
45% win rate at 2:1 with 1% risk on a 10% drawdown account: edge is 0.35, cushion is 10 losses, risk of ruin ≈ 0.6510 ≈ 1.3%. Cut risk to 0.5% and cushion becomes 20 losses: 0.6520 ≈ 0.02%. Same strategy, same win rate, 65x safer. The full framework is in the risk of ruin guide.
FAQ
What risk of ruin is acceptable?
For funded accounts most risk managers want under 2%, and under 1% for larger accounts. Above 5% you are gambling with the evaluation fee, not trading a strategy.
Does this model losing streaks?
Only on average. Real trade sequences cluster losses during chop and news periods, so treat the output as a best case and keep a daily loss limit as circuit breaker.