What is risk of ruin?
The risk of ruin is a statistical concept that matches the probability that you reach the point where it is no longer possible to recover the losses or continue. Please note that this is not the total capital in your account, as you should NEVER risk 100% of your capital.
Ideally, you should be prepared to risk 25-30% of your account as a MAXIMUM breakpoint before you need to stop trading. If that maximum is reached, review your trading plan for new goals and risk settings to determine if you can continue trading and then develop a new plan. You should never have a drawdown of 50% or more, because then you have to get 100% return, just for breaking even!
Considering that new traders are highly risk averse and have no idea of how much risk they can afford to take for each trade, they most likely end up blowing up their account. They probably did not wanted to see it as a possibility, just saw the opportunity to earn money.
Therefore, risk management is one of the key points a trader need to know well, to avoid reaching our point of destruction. This is what allows you to survive and stay in the game in order to have a greater chance of making money in the markets. Every trader must therefore calculate their chances of reaching this drawdown level. Simply put, the more you risk per trade, the more you increase the risk of destruction. So the easiest way to avoid the risk of ruin is to risk only a small portion of your account on each trade. Risk should never exceed 1-2% of the account per trade (preferably less) otherwise that path to point of destruction is where you are heading.
It is obviously not possible for a trader to make money without taking some risk, but it is imperative that he / she knows what his / her risk is and that he / she is prepared to take it. If a trader is not willing to take risks on his / her trading account, trading is not for him / her, it's that simple.
How the Risk Of Ruin Calculator works
You need to know a few things before you can use this calculator. You need to manually go to the indicator settings and make a few inputs over following:
(If you use a pine script strategy, you have all the info you need. Go to "Strategy Tester" and then "Performance Summary").
Inputs
Win rate = How profitable your strategy is in % terms.
Average win = Average winning trade, in money terms.
Average loss = Average losing trade, in money terms.
Risk per trade = How much risk of your portfolio you take at each trade.
Maximum Loss Of Portfolio = What is the total percentage loss of your portfolio that you can afford to risk before you stop trading.
Trade Capital = The total sum of your current trade capital.
Outputs
Payoff ratio = The payoff ratio is simply the system's average profit per trade divided by the average loss per trade.
Expectancy = Is the win rate of the strategy divided by payoff ratio.
Risk of ruin ( RoR ) = Risk of ruin is the probability of a strategy losing money, to the point where it is no longer possible to recover the losses or continue.
=============================================================================================================================================================
DISCLAIMER
Any data and information is provided 'as is' solely for informational purposes, and is not intended for trading purposes or advice. Past performance is not indicative of future results.
Educate yourself on the risks associated with trading, and seek advice from an independent financial or tax advisor if you have any questions.
=============================================================================================================================================================
The risk of ruin is a statistical concept that matches the probability that you reach the point where it is no longer possible to recover the losses or continue. Please note that this is not the total capital in your account, as you should NEVER risk 100% of your capital.
Ideally, you should be prepared to risk 25-30% of your account as a MAXIMUM breakpoint before you need to stop trading. If that maximum is reached, review your trading plan for new goals and risk settings to determine if you can continue trading and then develop a new plan. You should never have a drawdown of 50% or more, because then you have to get 100% return, just for breaking even!
Considering that new traders are highly risk averse and have no idea of how much risk they can afford to take for each trade, they most likely end up blowing up their account. They probably did not wanted to see it as a possibility, just saw the opportunity to earn money.
Therefore, risk management is one of the key points a trader need to know well, to avoid reaching our point of destruction. This is what allows you to survive and stay in the game in order to have a greater chance of making money in the markets. Every trader must therefore calculate their chances of reaching this drawdown level. Simply put, the more you risk per trade, the more you increase the risk of destruction. So the easiest way to avoid the risk of ruin is to risk only a small portion of your account on each trade. Risk should never exceed 1-2% of the account per trade (preferably less) otherwise that path to point of destruction is where you are heading.
It is obviously not possible for a trader to make money without taking some risk, but it is imperative that he / she knows what his / her risk is and that he / she is prepared to take it. If a trader is not willing to take risks on his / her trading account, trading is not for him / her, it's that simple.
How the Risk Of Ruin Calculator works
You need to know a few things before you can use this calculator. You need to manually go to the indicator settings and make a few inputs over following:
(If you use a pine script strategy, you have all the info you need. Go to "Strategy Tester" and then "Performance Summary").
Inputs
Win rate = How profitable your strategy is in % terms.
Average win = Average winning trade, in money terms.
Average loss = Average losing trade, in money terms.
Risk per trade = How much risk of your portfolio you take at each trade.
Maximum Loss Of Portfolio = What is the total percentage loss of your portfolio that you can afford to risk before you stop trading.
Trade Capital = The total sum of your current trade capital.
Outputs
Payoff ratio = The payoff ratio is simply the system's average profit per trade divided by the average loss per trade.
Expectancy = Is the win rate of the strategy divided by payoff ratio.
Risk of ruin ( RoR ) = Risk of ruin is the probability of a strategy losing money, to the point where it is no longer possible to recover the losses or continue.
=============================================================================================================================================================
DISCLAIMER
Any data and information is provided 'as is' solely for informational purposes, and is not intended for trading purposes or advice. Past performance is not indicative of future results.
Educate yourself on the risks associated with trading, and seek advice from an independent financial or tax advisor if you have any questions.
=============================================================================================================================================================
Phát hành các Ghi chú:
Changed some math formula issues.
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Small changes.
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Code changes.
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I want to raise a warning finger and say that what I wrote above regarding expectancy is not correct and is now edited. (Expectancy = Is the win rate of the strategy divided by payoff ratio) is not correct!
I have made two changes for expectancy in the script, one that shows expectancy in money term and the other one in ratio term.
I have made two changes for expectancy in the script, one that shows expectancy in money term and the other one in ratio term.
Phát hành các Ghi chú:
Risk of Ruin formula modification. Showed wrong ROR in case of lower winrate than 50% or less.
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Small modification.
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Risk of Ruin formula was edited due a formula code error. Now it should work just fine. Let me know otherwise.
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Another modification with the formula that needed to be edited.
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Added maxval and minval on winrate, risk per trade and maximum loss of portfolio.
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I have added numbers of trades and expectancy based on number of trades.
Phát hành các Ghi chú:
Edited a math formula issue that showed wrong RoR with smaller winrate than lossrate.
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Same issue as before, now edited.
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Some more edit.
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This is the last update for now. After about one month of debugging and testing, should the calculator work just perfect.
T H E most important tool you can have! Enjoy.
T H E most important tool you can have! Enjoy.
Phát hành các Ghi chú:
Updated the steps to 0.1 for risk per trade and Maximum loss.
Phát hành các Ghi chú:
Changed an error in the calculation "Expectancy ratio to risk per trade".
Phát hành các Ghi chú:
I updated the formula, since I found an incorrect calculation in the final phase, which is crucial for a correct result of ROR.
Correct numbers should now be displayed.
Correct numbers should now be displayed.
Phát hành các Ghi chú:
I have updated the risk of ruin calculator with Kelly % and Fractional Kelly Criterion. It is showing you, your maximun amount that you can invest, according to Kelly Criterion formula, but it is not the same as the maximum amount that can afford to lose. For more information, read about Kelly Criterion.
Phát hành các Ghi chú:
Updated to Kaufman RoR formula.