RISK OF RUIN (ROR) formula?

I am now reading a book called A TRADER'S MONEY MANAGEMENT SYSTEM. In this book he has referred another book where the author has prepared RISK OF RUIN (ROR) table. There is no formula in the book for ROR.

I would like to know the formula rather than checking the table (unless the calculation is super complex and beyond my math knowledge).

I have these nos. to find ROR
Win%
Payoff ratio
Risk%

I hope you guys know the formula. Can you please share it?

Took from the following link:
h t t p : / / w w w .poweryourinvestment . c o m / forum / technical / risk-ruin-determinng-optimal-position-size-426 . h t m l


This formula was originally developed by John L. Kelly Jr. of Bell Labs in the early 1940s, and is sometimes referred to as the Kelly formula. Edward
O. Thorp in The Mathematics of Gambling modified the fixed-fraction formula to account for the average payoff ratio, A, in addition to the average probability of success, p. The figures you will calculate using this formula are more aggressive than using the risk of ruin tables. In his book Money Management Strategies for Futures Traders, Professor Nauzer J. Balsara defines the formula for determining the optimal fraction, f , of capital to be risked on a trade as follows:

f = ( [(A+1) X P] - 1 ) / A

In this formula, the following definitions apply:

f is the optimal fraction (percentage) to be risked on one trade.

A is the average payoff ratio. (dollars earned to one dollar lost).

p is the average win ratio (probability in percentage of success).

Here is an example of the formula in use:


f is the unknown quantity (of the optimal percentage to be risked).

A is an average payoff ratio of 2 to 1.

p is an average win ratio of 35 percent winning trades.

f = ( [(2+1) X .35] - 1 ) / 2 = 0.025

To get a percentage, multiply f result by 100

This gives a value of .025 for f , or 2.5 percent is the optimal percentage of your trading account to risk on a trade based on this performance data and the optimal f formula.

Thanks for the reply...

But the formula you have given is to find optimal risk. In fact, it's there in the book I read. Just next to ROR...

I am still googling to get one... This is the best I could find...

ROR online calcuator

And another one here

risk_of_ruin = ((1 - Edge)/(1 + Edge)) ^ Capital_Units

But this doesn't account pay off ratio. And it doesn't work if the win % is less than or equal to 50%

Hello,



The best way to calculate risk of ruin is .......to find ur win% and based on that....u can calculate no of possible loosing streaks in a row....lets say
...u have a trading system with 35% win rate...u can expect Max of 34 loosing streaks in a row....based on this .....

if u risk 3% of ur capital on every trade ....and u started of with loosing streaks probably u end with bankruptacy.

in my opinion risk of ruin is ...Max system Drawdown....when equity becomes zero.

Yeah, ROR is to find how much risk I should take to avoid ROR i.e., go bankrupt.

With 35% win ratio, it is possible that ROR can "0". Yeah, with the risk of 5% and pay off ratio 5:1, it will be almost zero.

And with 2% risk and pay off ratio 3:1, it is "0".