What is a Risk of Ruin Calculator
Immerse yourself in the realm of Risk of Ruin (RoR), a compelling mathematical model that gauges the probability of depleting the entire account balance. This model operates on the basis of win/loss percentages from a trading system and the risk percentage allocated per trade.
For instance, consider a trader utilizing a system with a commendable 30% win rate, accompanied by an average profit factor of 2 while risking 2% per trade. By incorporating this data into the Risk of Ruin Calculator, traders can gain valuable insights into the overall resilience of their trading system. Moreover, this calculator serves as a crucial tool in managing the risk of ruin and peak-to-valley drawdown associated with the strategy.
Empowered by this calculator, traders can ascertain the likelihood of depleting their trading account over time, based on the win rate percentage and the average risk percentage per trade. By inputting performance statistics from a trading system into the RoR calculator, traders can effortlessly compute the risk of ruin for any given trading strategy.
How to Use the Risk of Ruin Calculator
Win Rate %: Input the overall win rate percentage of your trading system in this field. For instance, let’s consider a current trading strategy with a win rate of 30%.
Average Profit/Loss: Enter the average profit earned per winning trade divided by the average amount lost per losing trade. In our example, we will utilize an average profit factor of 2 for our current strategy.
Risk per Trade %: As a widely accepted practice, professional traders limit their risk to a maximum of 2% of the account equity per trade. This approach ensures longevity in the markets and provides an opportunity to recover from previous negative trades. Therefore, we will utilize a risk per trade of 2%.
Number of Trades: If you are testing a trading strategy and wish to evaluate its performance based on a specified number of future trades, simply input the expected number of trades. It could be 30 daily trades, 15 weekly trades, and so on.
Alternatively, if you are evaluating the performance and risk of ruin of an existing trading strategy, enter the total number of trades executed thus far. For this example, we will input 50 as the total number of trades for our current trading strategy.
Max Drawdown %: In this field, enter the maximum drawdown percentage achieved with the current trading strategy or the anticipated maximum drawdown when testing a new strategy. For our demonstration, we will input a 30% maximum drawdown reached with our current trading strategy.
Once the necessary inputs are provided, click the Calculate button.
The Results: The calculator promptly generates two vital outcomes. Firstly, the Risk of Peak-to-Valley Drawdown percentage is unveiled, which, in our case, stands at 21.1%. Peak-to-Valley Drawdown is defined as the largest cumulative percentage decline in portfolio value from a previous equity high. It represents the percentage decline from the peak to the subsequent lowest value. In our example, the trading strategy exhibits a 21.1% probability of encountering a 30% drawdown from the equity high to a subsequent equity low.
Secondly, the calculator reveals the Risk of Ruin percentage for our trading strategy, which amounts to 13.7%. This implies a 13.7% probability of reaching a 30% drawdown from the starting equity amount.
Please note that the output of the Risk of Ruin Calculator can vary as it is based on a simulation of 100,000 iterations, ensuring a comprehensive evaluation of potential outcomes.
The Risk of Ruin Calculator may also be used to analyse several potential random outcomes and fine-tune a trading system by simply modifying the total number of transactions made and the maximum drawdown percentage obtained.