Risk of Ruin – How Many Trades can You Afford to Lose?

To succeed in trading and in every other aspect of our life we have to learn to deal with failure. Here are some of my favourite quotes on this matter of failure:

“I never looked at the consequences of missing a big shot… when you think about the consequences you always think of a negative result.”

Michael Jordan

“I’ve missed more than 9000 shots in my career. I’ve lost almost 300 games. 26 times, I’ve been trusted to take the game winning shot and missed. I’ve failed over and over and over again in my life. And that is why I succeed.”

Michael Jordan

“Every adversity, every failure, every heartache carries with it the seed on an equal or greater benefit.”

Napoleon Hill

“Don’t be afraid of missing opportunities. Behind every failure is an opportunity somebody wishes they had missed.”

Lily Tomlin

What is The Risk of Ruin?

In it’s simplest form the risk of ruin involves losing so much of your trading capital that you can not recover or trade your way out of a draw down. To make this more concrete I used a few different risk levels to see how many consecutive losing trades one would have to make at each level before losing all there trading capital.

Note: Approximate numbers based on a $15,000 account size, assume ruin occurs when account balance less then $500.

A graphical view of the risk of ruin is shown below:

Money Management – Avoiding the Risk of Ruin 

I know you have heard it all before that the key to successful trading is money management. As you can clearly see from the above you could have the best trading instincts or system in the world, but without money management you could be out of the game in ten trades. An excellent resource on money management can be found  at Turtle Trader.

About the author

Mark - Is a 28 year old form Australia. He has a Bachelor in Economics and a Major in CS. He is currently working towards his CFP. His interests include algorithmic trading systems, artificial intelligence, game theory and poker.