Wick

Risk of ruin

The Math of an Edge

The size that quietly guarantees failure

Risk of ruin is the probability that a run of losses wipes you out before your edge has time to show up. It depends on three things: your edge, your risk per trade, and how much you can lose before you stop. Risk 2% per trade and even a rough patch is survivable. Risk 25% and four bad trades in a row — which, as we've seen, is completely normal — ends the account regardless of how good the strategy was. Position sizing is not a detail on top of a strategy. It is the thing that decides whether the strategy ever gets to work.

Check yourself

Why does risking 25% per trade fail even with a genuinely good strategy?

  1. The strategy needs bigger positions
  2. A normal losing streak ends the account before the edge can play out correct
  3. Fees are too high

Edges only pay out over many trades. Sizing that can't survive a normal streak means never reaching the many.

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