Risk
Risk of ruin
The chance of a deep drawdown depends on size and edge, and size matters more than most expect.
True by construction. No market data is needed to know it.
Illustrative simulation, seeded and reproducible (simulateRiskOfRuin in src/risk-math.mjs), not a published study.
What it is
In a seeded simulation of 1,000 trades with a fixed share of equity risked each time, ruin means a 50% drawdown from the peak. A plan with a real edge of +0.2R per trade (40% wins at 2:1) had almost no chance of ruin at 1% per trade, about 5% at 2%, about 98% at 5%. A plan with no edge (50% wins at 1:1) was ruined 6.6% of the time at 1% and 62.5% at 2%. With a negative edge, small size only delayed ruin.
What it suggests
Small size is what makes a bad stretch survivable. It does not create an edge. Real trading has streaks, gaps and slippage the simulation leaves out, so it understates the risk.
How to check it
Look at the risk per trade beside the trader's own expectancy.
Common mistakes
- Assuming small size makes a plan safe when it has no edge.
Sources
- The Exchange's own seeded simulation in src/risk-math.mjs (illustrative: real trading has streaks, gaps and slippage the simulation ignores) (abstract or primary page read)
Related lessons
Written in our own words. Education only, not financial advice.