Many people will talk about their forex Risk-Reward ratios such as it’s important to have 2:1, 3:1, or whatever to one ratio, but this is just the tip of the iceberg of risk-management and leaves you uninformed and un-empowered. You can actually have a 3:1 Reward-Risk ratio and lose all the money in your account. You can also have a 1:1 Reward-Risk ratio and make money day in day out.
How can you understand the difference between the two? Through the Risk-of-Ruin formula.
We did a 1hr webinar on Risk Management, the Risk of Ruin formulas and how critical they are, whether you are trading Price Action Strategies, Ichimoku Kinko Hyo, or any other system.
I got many requests for the information contained in the Risk of Ruin formulas so I am posting all the tables here so you can see the mathematics of your trading and whether you have the numbers in your favor. Here they are below:
Risk of Ruin Formula using 10% Risk/Trade
| ROR% with 10 capital at risk | |||||
| Win Ratio % | Payoff Ratio 1:1 | PR 2:1 | PR 3:1 | PR 4:1 | PR 5:1 |
| Win Ratio 10% | 100 | 100 | 100 | 100 | 100 |
| Win Ratio 15% | 100 | 100 | 100 | 100 | 100 |
| Win Ratio 20% | 100 | 100 | 100 | 100 | 46.6 |
| Win Ratio 25% | 100 | 100 | 100 | 30.5 | 16.3 |
| Win Ratio 30% | 100 | 100 | 27.7 | 10.2 | 6.1 |
| Win Ratio 35% | 100 | 60.9 | 8.2 | 3.53 | 2.33 |
| Win Ratio 40% | 100 | 14.2 | 2.5 | 1.24 | 0.888 |
| Win Ratio 45% | 100 | 3.41 | 0.761 | 0.426 | 0.329 |
| Win Ratio 50% | 100 | 0.813 | 0.226 | 0.141 | 0.116 |
| Win Ratio 55% | 13.4 | 0.187 | 0.0635 | 0.0438 | 0 |
| Win Ratio 60% | 1.73 | 0.0401 | 0 | 0 | 0 |
| Win Ratio 65% | 0.205 | 0 | 0 | 0 | 0 |
| Win Ratio 70% | 0 | 0 | 0 | 0 | 0 |
| Win Ratio 75% | 0 | 0 | 0 | 0 | 0 |
| Win Ratio 80% | 0 | 0 | 0 | 0 | 0 |
| Win Ratio 85% | 0 | 0 | 0 | 0 | 0 |
| Win Ratio 90% | 0 | 0 | 0 | 0 | 0 |
Risk of Ruin Formula using 5% Risk/Trade
| ROR% with 5 capital at risk | |||||
| Win Ratio % | Payoff Ratio 1:1 | PR 2:1 | PR 3:1 | PR 4:1 | PR 5:1 |
| Win Ratio 10% | 100 | 100 | 100 | 100 | 100 |
| Win Ratio 15% | 100 | 100 | 100 | 100 | 100 |
| Win Ratio 20% | 100 | 100 | 100 | 100 | 21.7 |
| Win Ratio 25% | 100 | 100 | 100 | 9.33 | 2.67 |
| Win Ratio 30% | 100 | 100 | 7.67 | 1.03 | 0.372 |
| Win Ratio 35% | 100 | 37.1 | 0.672 | 0.124 | 0.0544 |
| Win Ratio 40% | 100 | 2.03 | 0.0623 | 0 | 0 |
| Win Ratio 45% | 100 | 0.116 | 0 | 0 | 0 |
| Win Ratio 50% | 100 | 0 | 0 | 0 | 0 |
| Win Ratio 55% | 1.81 | 0 | 0 | 0 | 0 |
| Win Ratio 60% | 0 | 0 | 0 | 0 | 0 |
| Win Ratio 65% | 0 | 0 | 0 | 0 | 0 |
| Win Ratio 70% | 0 | 0 | 0 | 0 | 0 |
| Win Ratio 75% | 0 | 0 | 0 | 0 | 0 |
| Win Ratio 80% | 0 | 0 | 0 | 0 | 0 |
| Win Ratio 85% | 0 | 0 | 0 | 0 | 0 |
| Win Ratio 90% | 0 | 0 | 0 | 0 | 0 |
Risk of Ruin Formula using 2% Risk/Trade
| ROR% with 5 capital at risk | |||||
| Win Ratio % | Payoff Ratio 1:1 | PR 2:1 | PR 3:1 | PR 4:1 | PR 5:1 |
| Win Ratio 10% | 100 | 100 | 100 | 100 | 100 |
| Win Ratio 15% | 100 | 100 | 100 | 100 | 100 |
| Win Ratio 20% | 100 | 100 | 100 | 100 | 2.2 |
| Win Ratio 25% | 100 | 100 | 100 | 0.266 | 0 |
| Win Ratio 30% | 100 | 100 | 0.163 | 0 | 0 |
| Win Ratio 35% | 100 | 8.37 | 0 | 0 | 0 |
| Win Ratio 40% | 100 | 0 | 0 | 0 | 0 |
| Win Ratio 45% | 100 | 0 | 0 | 0 | 0 |
| Win Ratio 50% | 100 | 0 | 0 | 0 | 0 |
| Win Ratio 55% | 0 | 0 | 0 | 0 | 0 |
| Win Ratio 60% | 0 | 0 | 0 | 0 | 0 |
| Win Ratio 65% | 0 | 0 | 0 | 0 | 0 |
| Win Ratio 70% | 0 | 0 | 0 | 0 | 0 |
| Win Ratio 75% | 0 | 0 | 0 | 0 | 0 |
| Win Ratio 80% | 0 | 0 | 0 | 0 | 0 |
| Win Ratio 85% | 0 | 0 | 0 | 0 | 0 |
| Win Ratio 90% | 0 | 0 | 0 | 0 | 0 |
Risk of Ruin Formula using 1% Risk/Trade
| ROR% with 5 capital at risk | |||||
| Win Ratio % | Payoff Ratio 1:1 | PR 2:1 | PR 3:1 | PR 4:1 | PR 5:1 |
| Win Ratio 10% | 100 | 100 | 100 | 100 | 100 |
| Win Ratio 15% | 100 | 100 | 100 | 100 | 100 |
| Win Ratio 20% | 100 | 100 | 100 | 100 | 0.0485 |
| Win Ratio 25% | 100 | 100 | 100 | 0 | 0 |
| Win Ratio 30% | 100 | 100 | 0 | 0 | 0 |
| Win Ratio 35% | 100 | 0.701 | 0 | 0 | 0 |
| Win Ratio 40% | 100 | 0 | 0 | 0 | 0 |
| Win Ratio 45% | 100 | 0 | 0 | 0 | 0 |
| Win Ratio 50% | 100 | 0 | 0 | 0 | 0 |
| Win Ratio 55% | 0 | 0 | 0 | 0 | 0 |
| Win Ratio 60% | 0 | 0 | 0 | 0 | 0 |
| Win Ratio 65% | 0 | 0 | 0 | 0 | 0 |
| Win Ratio 70% | 0 | 0 | 0 | 0 | 0 |
| Win Ratio 75% | 0 | 0 | 0 | 0 | 0 |
| Win Ratio 80% | 0 | 0 | 0 | 0 | 0 |
| Win Ratio 85% | 0 | 0 | 0 | 0 | 0 |
| Win Ratio 90% | 0 | 0 | 0 | 0 | 0 |
Hopefully after viewing the Risk of Ruin tables and underlying forex trading risk mathematics, you will begin to look at your trading differently, analyze whether you have the mathematics in your favor to make money day in day out, or are setup to lose money. Understanding the mathematics of risk can make all the difference in the world so make sure you study these numbers in relation to trading your rule-based system.
Trading Foreign Exchange on margin carries a high level of risk, and may not be suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to invest in foreign exchange, you should carefully consider your investment objectives, level of experience, and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with foreign exchange trading, and seek advisce from an independent financial advisor if you have any doubts.
Editors’ Picks
EUR/USD extends recovery beyond 1.0400 amid Wall Street's turnaround
EUR/USD extends its recovery beyond 1.0400, helped by the better performance of Wall Street and softer-than-anticipated United States PCE inflation. Profit-taking ahead of the winter holidays also takes its toll.
GBP/USD nears 1.2600 on renewed USD weakness
GBP/USD extends its rebound from multi-month lows and approaches 1.2600. The US Dollar stays on the back foot after softer-than-expected PCE inflation data, helping the pair edge higher. Nevertheless, GBP/USD remains on track to end the week in negative territory.
USD/JPY dips to test a previous top at 156.60 following hot Japanese inflation
The Yen trims some losses following higher than expected inflation levels in Japan. The hot inflation figures have increased hopes of a BoJ hike in January. Technically, the pair is correcting lower, after having reached strongly overbought levels.
Editors’ Picks
EUR/USD extends recovery beyond 1.0400 amid Wall Street's turnaround
EUR/USD extends its recovery beyond 1.0400, helped by the better performance of Wall Street and softer-than-anticipated United States PCE inflation. Profit-taking ahead of the winter holidays also takes its toll.
GBP/USD nears 1.2600 on renewed USD weakness
GBP/USD extends its rebound from multi-month lows and approaches 1.2600. The US Dollar stays on the back foot after softer-than-expected PCE inflation data, helping the pair edge higher. Nevertheless, GBP/USD remains on track to end the week in negative territory.
Gold rises above $2,620 as US yields edge lower
Gold extends its daily rebound and trades above $2,620 on Friday. The benchmark 10-year US Treasury bond yield declines toward 4.5% following the PCE inflation data for November, helping XAU/USD stretch higher in the American session.
Bitcoin crashes to $96,000, altcoins bleed: Top trades for sidelined buyers
Bitcoin (BTC) slipped under the $100,000 milestone and touched the $96,000 level briefly on Friday, a sharp decline that has also hit hard prices of other altcoins and particularly meme coins.
Bank of England stays on hold, but a dovish front is building
Bank of England rates were maintained at 4.75% today, in line with expectations. However, the 6-3 vote split sent a moderately dovish signal to markets, prompting some dovish repricing and a weaker pound. We remain more dovish than market pricing for 2025.
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