Have you ever wondered why some traders, despite having many winning trades, end up losing it all🤔? This can be explained by the so-called Risk of Ruin or RoR for its initials in English (Risk of Ruin). In short, Risk of Ruin is a calculation that shows the probability of a trader losing all their capital (or reaching a level so low that they can no longer trade). This calculation will depend on their win percentage, losses, and the risk they take on each trade. Many beginners are unaware of this, but it is key to surviving in trading and being profitable in the long run.
As an example, a trader who risks 10% of their capital per trade, with a Risk:Reward ratio of 1:1 (that is, when they win, they win the same amount they risk) and with a win percentage of 50% (that is, wins 1 out of every 2 trades), has a Risk of Ruin of 100%. This means that sooner or later, they will burn their account (lose their capital).
As a reference, a professional trader risks 1% - 2% of their capital per trade.
It is all too common to see novice 'traders' losing their money due to not knowing how to manage their accounts, which involves at least:
Having a Strategy: follow a defined and tested strategy.
Risk Management: define % risk in each trade, risk/reward ratio, level of leverage, use of Stop Loss (without moving them hoping for miracles) and Take Profit.
Emotion Management: act with a cool mind, never act out of FOMO, and be disciplined.
Here is a table I made as a reference to know your risk of ruin.
The risk of ruin reminds us that good intentions and the desire to make money are not enough. We need strict risk management, discipline, and a strategy with a real statistical edge. Otherwise, sooner or later, market volatility can work against us.
It doesn't matter the currency, to be profitable keep a cool head and protect your capital 💪.
What do you think? Do you have any advice to improve management?
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This article has been simplified for easy understanding by people who are just starting and to motivate their desire to study and learn in the world of trading.
