π Quant & Trading
Trading - Risk of Ruin
The probability of losing enough capital that recovery becomes **impossible or impractical**. Not the same as max drawdown β drawdown measures the worst dip, ruin means game over. If drawdown is a bad day, ruin is closing the account.
2
Minutes
6
Concepts
+45
XP
1
The Formula (Simplified)
P(ruin) = ((1 - edge) / (1 + edge)) ^ (capital / bet_size) Where: edge = your expected edge per trade (e.g., 0.02 = 2%) capital = total bankroll bet_size = amount risked per trade Example: edge = 2%, capital = $10,000, bet_size = $500 P(ruin) = (0.98 / 1.02) ^ (10000 / 500) = 0.961 ^ 20 = 0.45 -> 45% chance of ruin. Way too high.
As edge β 0 or bet_size β large, P(ruin) β 1. The formula punishes over-betting ruthlessly.