Risk of ruin and sequence risk
Choose a risk per trade you could survive twice. · 8 min
Decide first
Sequence risk. With a fixed fraction risked per trade, the final result of a set of trades does not depend on their order. Everything along the way does. Put the 30 losses first and the account falls 45.5% before the first win; spread them out and the deepest hole can be as small as 6%. Shuffle the order below and watch the ending stay put while the drawdown jumps around.
Same trades, different order
50 trades: 20 wins of +2R and 30 losses of −1R, a +0.2R edge. Only the order changes.
- Final result, any order
- 19.5%
- Max drawdown, this order
- 23.2%
- Max drawdown, losses first (dashed)
- 45.5%
- Median over 2,000 orders
- 13.5%
- Orders with a 20% drawdown
- 9.6%
Risk of ruin is the chance that a drawdown reaches a level you cannot or will not continue from: a margin call, a broken rule, a lost nerve. Call it ruin at −30% or −50%. It depends far more on the risk per trade than on the edge:
Risk of ruin by risk per trade
Simulated data · not real prices2,000 simulated traders per row, 500 trades each, same edge.
| Risk per trade | Median max drawdown | Chance of −30% | Chance of −50% |
|---|---|---|---|
| 0.5% | 8.2% | 0.0% | 0.0% |
| 1.0% | 15.8% | 1.8% | 0.0% |
| 2.0% | 29.5% | 46.6% | 2.4% |
| 3.0% | 41.5% | 92.3% | 21.4% |
| 5.0% | 61.3% | 100.0% | 84.9% |
| 10.0% | 88.9% | 100.0% | 100.0% |
Worked example: sizing for a drawdown limit
- Rule: no more than a 20% drawdown from a streak of 15 losses.
- Solve (1 − f)¹⁵ = 0.80.
- f = 1 − 0.80^(1/15) = 1.48%.
- Survive it twice? A second such streak right after the first takes the account to 0.80² = 64%. If that would end your trading, size lower.
Common mistake: choosing risk from the average case
At 5% risk the +0.2R edge still grows the median account, yet in the table above most traders at that size see a 50% drawdown on the way. You only live one path, and some paths start with the worst stretch. Size for the bad path you can survive, not the average path you hope for.
Check yourself
- Same +0.2R edge (40% at 2R), 500 trades. Which risk per trade gives roughly a 1-in-5 chance of a 50% drawdown at some point?
- Same trades, same fixed-fractional risk, two different orders. Which statement is true?
- You want to survive a streak of 12 losses with no more than a 15% drawdown. What is the most you can risk per trade?
Closing round
Before the round, write your ruin line (for example −20%) and the risk per trade that keeps 15 losses above it. Then play the round at that size.
Play the round in the simulator →The simulator's markets are generated, not real prices; the round practises the arithmetic, it does not predict anything.
Further reading: Tharp, Trade Your Way to Financial Freedom. The lesson teaches the idea in its own words and exercises.