Frequently Asked Questions
What is risk of ruin in trading? ▼
Risk of ruin is the probability that your account will drop to a defined threshold (e.g., 20% drawdown) before you achieve your target. It is influenced by three factors: your win rate, your average R:R (risk:reward), and the percentage you risk per trade. Even a positive expected value system can have a significant risk of ruin if you risk too much per trade.
What is the Kelly Criterion and should I trade at full Kelly? ▼
The Kelly Criterion is an algorithm for sizing bets to maximise long-term account growth: Kelly % = WinRate - (1-WinRate)/R. At full Kelly, account drawdowns can be extreme — a run of losses can temporarily halve your account even with a positive expectancy system. Most professional traders use half-Kelly (half the Kelly percentage) as their maximum risk, which substantially reduces volatility while still growing the account.
What risk of ruin is acceptable for a prop firm account? ▼
For a prop firm funded account with a 10% max drawdown limit, you want a risk of ruin below 5% — ideally below 2%. At 1% risk per trade with a 55% win rate and 1:2 R:R, the risk of ruin against a 10% drawdown over 100 trades is typically under 1%. Higher risk per trade (2%+) can push this above 10%, making funded account breaches statistically likely over time.
Why does this calculator use Monte Carlo simulation instead of a formula? ▼
Closed-form risk of ruin formulas exist but assume a fixed win rate and R:R with no variance. Monte Carlo simulation accounts for the random sequence of wins and losses — since the same win rate can produce very different equity paths depending on the order of outcomes. Running 1,000+ simulated paths gives a realistic distribution of outcomes, including worst-case and best-case scenarios.