Risk of ruin is the probability that capital reaches a predefined failure boundary within a chosen period. The boundary may be zero, but it can also be a drawdown after which the strategy can no longer be traded as planned.
What the number requires
There is no universal risk-of-ruin percentage. A meaningful estimate needs a ruin threshold, a time horizon and assumptions about returns, position sizing, leverage, costs and dependence between outcomes. Win rate and a quoted risk/reward ratio alone are not enough.
The estimate is model-dependent: if market behavior or sizing changes, the reported probability can become stale. See Risk of ruin for the full model, path dependence and practical limits.
Sources
- NIST, Gambler's ruin distribution — documents the classical probability model for reaching a ruin boundary.
- J. L. Kelly Jr., A New Interpretation of Information Rate — primary paper connecting repeated proportional stakes, capital growth and survival.