Risk of Ruin

Risk of Ruin Table

Hello Traders,

It is said that Trading/Investing and Gambling are the same, well they might have similar characteristics, one of them and probably the main one is that they both are based in probabilities.

And that is exactly what make them different as well, in Trading/Investing a trader might put more probabilities on his/her side by choosing carefully his/her entries and exits points based on proven methodologies or systems and not just letting things happen by chance.

Mathematicians have developed formulas to calculate the risk of a gambler or trader for this matter to get ruined, these formulas are based on statistical data such as:

- Win Ratio – The percentage number of winning trades
- Payoff Ratio – How many dollars you earn compared to one dollar lost
- Percent of capital exposed

Here you have a Risk of Ruin Table considering that the trader is exposing 10% of capital on each trade .

Risk of Ruin Probabilities Payoff Ratio 1 to 1 Payoff Ratio 2 to 1 Payoff Ratio 3 to 1 Payoff Ratio 4 to 1 Payoff Ratio 5 to 1
Win Ratio 25% 100 % 100 % 99 % 30.3 % 16.2 %
Win Ratio 30% 100 % 100 % 27.7 % 10.2 % 6.0 %
Win Ratio 35% 100 % 60.8 % 8.2 % 3.6 % 2.3 %
Win Ratio 40% 100 % 14.3 % 2.5 % 1.3 % 0.8 %
Win Ratio 45% 100 % 3.3 % 0.8 % 0.4 % 0.3 %
Win Ratio 50% 99 % 0.8 % 0.2 % 0.1 % 0.1 %
Win Ratio 55% 13.2 % 0.2 % 0.1 % 0.1 % 0.0 %
Win Ratio 60% 1.7 % 0.0 % 0.0 % 0.0 % 0.0 %

Note that 0.0% probability means the total loss of equity is unlikely, but not impossible.

Hope this information will help you develop a sound Money Management system that cosiderably will reduce your Risk of Ruin!

Remember, rule #1 Don’t loose money and rule #2 Don’t forget rule #1.

Cheers for now,

Max Ramirez
sniper@sniperforextrader.com

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Thursday, April 29th, 2010 Articles No Comments