Concept That Not Everyone Is Aware Of: The Risk of Ruin

Risk of Ruin (RoR) – The Hidden Danger You Can't Afford to Ignore!

Risk of Ruin (RoR) is not just a statistic it's a stark reality that can determine your survival in the trading world. It represents the probability of losing all your capital due to poor trade management or overleveraging. Understanding and managing RoR is not optional it's essential for your financial survival.

RoR Calculation Scale:

RoR is typically calculated on a per-trade or per-week/month/year basis, considering your capital, trade frequency, and risk tolerance. The formula often involves your win rate and the capital risked per trade.

- Low RoR: Indicates a small chance of blowing your account (less than 10-20%).
- High RoR: Indicates a significant chance of total loss (above 30-50%).

Risk-to-Reward (R/R) Ratio:

The R/R ratio compares the potential reward to the risk on a trade. For example, a 1:3 R/R means risking $1 to make $3. Managing RoR helps optimize your R/R by reducing position size when RoR is high, leading to a more sustainable trading approach.

Example:

- Low RoR: If RoR is 5%, your chances of losing all capital are minimal, allowing you to take higher R/R setups.
- High RoR: If RoR is 50%, you must reduce your risk per trade to avoid a total loss.

The Alarming Reality:

Statistics reveal a harsh truth: over 93% of new traders quit trading after 5 years, and over 80% quit within the first 2 years.
This isn't just a number it's a warning. Without proper risk management, you are statistically more likely to fail than to succeed.

To assist in calculating RoR, consider using the Risk of Ruin Calculation utility available on the MQL5 Market but only for mt5.
This tool calculates the probability of losing substantial amounts of money through trading, investing, or gambling, allowing you to set specific date ranges and balance levels to assess your risk. Check it out here!

I tried searching for an MT4 solution but couldn't find anything. However, I can calculate it manually see attached snapshot

Understanding Your Risk of Ruin (RoR) and Maximum Drawdown (Max DD)

As per the results in the attached snapshot:

Risk of Ruin (RoR): 0.50%
Risk of Maximum Drawdown: 16.60%

What This Means:
- A 0.5% RoR means you have a very low chance of completely blowing your account. Your risk management is strong!
- A 16.6% Risk of Max Drawdown means there is a 16.6% chance that your account could experience a 16.6% or greater drawdown.

Why This Matters:
Low RoR = Good → Your trading strategy is designed for long-term survival.
High Drawdown Risk = Caution → You may experience large temporary losses, which can be emotionally and financially tough.

What to Do Next:
- If 16.6% drawdown is too high for you, consider reducing your risk per trade or tightening your stop-loss strategy.
- If you're comfortable with this level of risk, your account is in a strong position for long-term survival.


Don't Risk Losing Everything:
In trading, ignorance is not bliss it's a fast track to financial ruin. Educate yourself, manage your risks, and trade wisely. Your financial future depends on it.

Remember: Failing to manage risk is failing to trade successfully.
Good luck, and may your trades be wise and well-managed!