If you understand this, you will not fail in trading

HOLY GRAIL of trading | Edition 74

What I'm about to show you is the HOLY GRAIL of trading.
It's probably the most important concept in trading.
Master this and
You will never blow up your accounts again.
I know that for me it was an "AHA" moment.
That concept is called risk of ruin.

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So what is risk of ruin?

Risk of ruin is a statistical concept that tells professional traders the probability of them losing their trading account.
Basically, it calculates your chance of losing your trading account with your current strategy.
That's HUGE.
Imagine if you knew you had a 99% chance of losing your money with what you're doing, would you continue?
Of course not, it's just a matter of time until you blow up.
Risk of ruin doesn't necessarily mean you have to lose your entire account balance.
It can be 50%, 80%, or 100% of your account, depending on everyone's risk level.

The math behind risk of ruin

Let’s take an example with 2 traders, Alex and Maya, who both learn the same trading system.

The system wins 56% of the time and has equal average wins and losses.

Both start with $15,000 in risk capital, and “ruin” means losing all of it.

• Alex risks $3,000 per trade, giving him 5 units of risk($15,000 / $3,000).

• Maya risks $1,500 per trade, giving her 10 units of risk ($15,000 / $1,500).

Alex gets ruined after just 5 consecutive losses.

Maya needs 10 in a row to be wiped out.

I will use Perplexity here to visually show you what I mean.

Risk of ruin drops as position size shrinks chart

Both traders use the exact same system, same capital, same win rate. The only variable is position size, yet their probability of blowing up differs by more than 3x.

BUT 9% Is Still Too High

Even Maya’s 9% risk of ruin is not acceptable for a serious trader.

Any probability above 0% is essentially a guarantee of eventual ruin, given enough trades.

Think of it this way: if you flip a coin that comes up “ruin” 9% of the time, you will eventually land on it.

The target must be 0% risk of ruin.

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How I reduce my risk of ruin below 1%

Now mathematically I know it is not possible to be 0.

However, you can bring it down to 0.4%, which, when rounded, does become 0 percent.

There are 3 ways you can reduce your risk of ruin:

• reducing position size

• improving your win rate

• improving your risk-to-reward ratio.

Let’s introduce a third trader: Tom

Alex, Maya, and now Tom all trade the same system: 56% win rate, equal average win and loss, $15,000 in risk capital.

The only difference between them is how much they risk per trade.

Tom simply divides his $15,000 capital by 20 instead of 5 or 10, giving him $750 of risk per trade.

Same system, same edge, but a radically different probability of surviving long enough to let that edge pay off.

You see how just through the simple action of reducing your position size you lower your risk of ruin.

Going from 5 units to 10 units cuts risk from 30% to 9%.

Going from 10 to 20 units cuts it again from 9% to just 1%.

divide your risk capital by at least 20 to get your maximum risk per trade.

For a $15,000 account, that means no more than $750 per trade.

For a $10,000 account, that is $500 per trade.

Alex might generate larger dollar wins when trades go his way, but he carries a 30% chance of blowing up before he ever builds a track record.

Tom wins less per trade in dollar terms, but he has a 99% chance of staying in the game long enough for his 56% edge to work consistently over time.

Successful trading requires you to treat capital preservation as the first priority.

Method 2 - Improving your win rate

With the same 20 units and a 1:1 payoff, bumping your system’s accuracy from 56% to 60% has a massive effect:

Tom at 20 units with a 60% win rate effectively reaches below 1%

0% risk of ruin.

a higher win rate means losing streaks long enough to cause ruin become statistically near-impossible.

Method 3 - Improving your risk to reward ratio

The risk to reward ratio (average win divided by average loss) is arguably the most powerful method of all, because it works even when your accuracy is only 50%.

• 1.1:1 to 1.4:1 payoff ratios still carry meaningful ruin risk (3% to 19%)

• 1.5:1 and above drives risk of ruin to effectively 0%, even at a coin-flip 50% accuracy rate
  
  This means making $1.50 on winners and losing $1.00 on losers is the threshold where survival is mathematically near-certain at 20 units

A warning to traders

Every trader has a statistical risk of ruin, yet most do not know it.

Most are ignorant.

Traders who do not know their own risk of ruin should calculate it immediately, and if it is above 1 percent, they should stop trading.

You should not trade, because it is guaranteed you will go bust;

you just do not know when.

It is just a matter of time until you blow up your account.

Please do not start trading until you reduce your risk of ruin to 0%.

You have no chance in this. Please!

How to calculate your own risk of ruin

We will take the exact statistics of our strategy that we use at Freedom Trades and I will use here a tool that I literally found on the first search on Google.

We will define risk of ruin as a 50% drawdown and we will simulate these calculations 1000 times to make sure they are accurate.

These were the results.

Risk of ruin for Freedom Trades

Basically, after 1000 simulations we have a chance to hit a maximum drawdown of 33% with an average drawdown of 18%.

Even though our win rate is low, 28%, our reward to risk ratio is high.

That is, when we lose, we lose little, but when we win, we win big.

Now imagine how much profit you could generate if you improved the win rate even further.

This is why I always say, do not focus on strategies that have a high win rate.

The ones that have a low win rate are much more robust.

You can improve the strategy so much further.

NOW

How do you calculate your own risk of ruin?

Very simple, in this tool or table you include

1. your win rate,

2. your risk per trade,

3. your reward/risk ratio,

4. your target drawdown (this will be your ruin definition, it can be 30%, 50%, or 100% the risk to lose all of your money).

5. Then you let it run 1000 simulations.

All of this is possible to calculate if you have a trading journal.

That is why I keep saying, journal your trades.

Without knowing your stats, you cannot succeed in this field.

It is the first step.

YOU CAN’T IMPROVE WHAT YOU DO NOT MEASURE.

Remember that.

You have just seen how risk of ruin works and how small changes in risk per trade can be the difference between survival and blowing up.
If you do not want to figure all of this out alone, this is exactly what we work on every day inside Freedom Trades PRO.

Plus, you get:

• Daily trade signals with exact entry and stops.

• My full focus list every morning before market open

• Access to 100+ members who trade this same swing trading playbook

• The exact strategy I use

If you are thinking about joining the community, right now is the best time to do it.
The yearly plan is 49% off.

See you inside :)

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“One trade closer to freedom.”
Vladislav

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