TradersCALM - Why Derive Risk of Ruin?
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Any trader can lose money. No system makes money on every trade. However good your trading system, however good its reward to risk ratio, just over-trading plus a run of losses and your account balance can 'disappear'.
But the idea behind calculating your risk of ruin is to find out how likely this is.
And to learn how to change the likelihood to a value you are comfortable with.
Such a comfort level might be 1 in 1,000 or 1 in 5,000 or 1 in 1,000,000. But once you have determined your risk of ruin - and are using a position size consistent with your preferred risk of ruin - your fear level drops, your error rate falls away, you start noticing fresh aspects of the market and old aspects of your trading behaviour that previously your fear had hidden from you. This leads to improvements in your trading system, a higher reward to risk ratio and more profits.
To get to this virtuous circle of more confidence, less fear, more improvements, calmer, more improvements, calmer, more improvements, calmer, ... you need to calculate your risk of ruin.
How do I perform the calculations for my personal risk of ruin?
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Risk of Ruin