Risk of Ruin

[Nowler]

Hey folks,

I really appreciate it if some of you would discuss Risk of Ruin, so that i can better understand it.
I have attached the RoR of my own live mini account.

* Edited the wording because I implied that in was the one that would discuss it ( I needed you guys to, so I could watch)

 

[Nowler]

Anyone?

 

[timsk]

I'd like to discuss Risk of Ruin in order to better understand it.
I have attached the RoR of my own live mini account

Hi Nowler,
I suspect you've not had a reply because your OP implies that you are going to discuss it - so we're all waiting with baited breath to hear what you have to say!


However, if you want an interpretation of the screen grab, then mine is that the middle 'Probability of Loss' row is largely meaningless as all the figures are the same and I'm not sure why they don't all say 100%. Otherwise, it's telling you that if you have 8 consecutive losing trades that that will result in a 10% draw down (Loss Size) on your account and, at the other end of the spectrum, that if you have 75 consecutive losing trades that that will result in a complete blow up. In reality, it would happen much sooner than that - probably around 60 consecutive losing trades because you won't have sufficient margin to continue trading beyond that point and your broker will automatically close out all your trades leaving you ____. But that depends largely on the market you're trading and your broker etc.

This Article may be of interest: Risk of Ruin.
Tim.

PS. ____ = flat (broke pretty much in this example!)

 

[Quantt]

Hey folks,

I'd like to discuss Risk of Ruin in order to better understand it.
I have attached the RoR of my own live mini account

Frankly I have no idea what this picture repents, but you can calculate how many losses will ruin you based on your risk % and with some basic math you'll see it will never be 100% ruin, because if you risk a percentage you will always have money to trade theoretically even tough at the end it''ll be a fraction of a penny and probably not enough to cover the transaction costs...

 

[Nowler]

Oops!
Not sure why I went that way about saying it. I've edited it now


The RoR was bothering me because I couldn't tell if it was saying that from my results so far that there was a 99.99% chance of ruin...then I was wondering why i'd have the same probability for 10% as 100%...

I wonder how they are calculating the number of losing trades to ruin though... I wonder if it's an average loss per trade, or perhaps the most recent percentage placed on a trade... surely average loss per trade.

I've always looked at my account as if I risk 1% and am wrong, then I can be wrong 99 more times. Obviously it would be more than 99 more...and as Quantt pointed out, theoretically I will always something in my account...unless I risk 100% on a losing trade.

Thanks for the input lads

PS: Thanks for the link Tim.
I'll have a gander at it now in a few mins.

 

[timsk]

. . .The RoR was bothering me because I couldn't tell if it was saying that from my results so far that there was a 99.99% chance of ruin...then I was wondering why i'd have the same probability for 10% as 100%...

Hi Nowler,
The middle row says 99.99% 'Probability of Loss' - not ruin. In other words, if you have a losing trade the probability that this is reflected in a reduced bottom line figure is 99.99%. So, going from left to right . . .
A. The probability of blowing up and losing your whole account is 99.99% if you have 75 consecutive losing trades.
B. The probability of almost blowing up and losing 90% your account is 99.99% if you have 68 consecutive losing trades.
C. The probability of a humongous loss amounting to 80% of your account is 99.99% if you have 60 consecutive losing trades.
D. The probability of a massive loss amounting to 70% of your account is 99.99% if you have 53 consecutive losing trades.
E. The probability of a huge loss amounting to 60% of your account is 99.99% if you have 45 consecutive losing trades.
. . . So on and so forth.

I wonder how they are calculating the number of losing trades to ruin though... I wonder if it's an average loss per trade, or perhaps the most recent percentage placed on a trade... surely average loss per trade.

There's only one way to know for sure and that's to ask them!

I've always looked at my account as if I risk 1% and am wrong, then I can be wrong 99 more times. Obviously it would be more than 99 more...and as Quantt pointed out, theoretically I will always something in my account...unless I risk 100% on a losing trade.

Risk management is a hotly debated topic and there are many different approaches to it. Until you are very confident of your own key stats based on live trading over a sustained period (preferably in different market conditions), always air on the negative side and be extremely cautious. (If you don't know what I'm refering to, then check out this Sticky: Essentials Of 'Risk & Money Management'.) Increasingly, I'm of the view that risking even 1% on a single trade is too high and that the approach taken by traders like darktone is one that many people - especially newbies - would do well to emulate. In a nutshell, if I remember rightly, the Dax (which he trades) would have to suddenly drop 50% in value for him to have a blow up. And that will only ever happen if there's the mother of all Black Swan events that would probably mean the end of the financial system as we know it. It could happen, but his risk of ruin is smaller than the risk of him tripping over his own feet when getting out of bed and breaking his neck!
Tim.

 

[Quantt]

Thanks for the input lads

Nowler, Risk Management is probably the most important element of a trading strategy, even with mediocre trading system, if your risk is set correctly you can still make money... There were even tests with random stocks selection and good risk management = to making money... There is nothing mysterious about it, what you need is data spawning few market cycles either form your trades or from back testing and from there you can calculate the optimal betting size for your trading strategy, one very smart man, Ed Thorp, suggested a half Kelly to be a very good conservative start for trading (where you are not sure of the future trading outcome)...

https://www.investopedia.com/articles/trading/04/091504.asp

 

[Signalcalc]

All this table shows is the number of trades before you hit a percentage loss, in the case of 100% it's 75 consecutive trades. But it's meaningless. Before you hit 15 consecutive losses you are most likely to have stopped trading the strategy anyway.

My guess this is a table provided by a broker or charting program, total BS!

What you need to be attempting to work out is the risk of ruin of the strategy itself, for that you need some complex maths or clever software and even then it could be wrong.

Maybe have a read of this article and see if it sparks any interest:

Fooled By Monte Carlo Simulation

 

[Nowler]

Hi Nowler,
The middle row says 99.99% 'Probability of Loss' - not ruin. In other words, if you have a losing trade the probability that this is reflected in a reduced bottom line figure is 99.99%. So, going from left to right . . .
A. The probability of blowing up and losing your whole account is 99.99% if you have 75 consecutive losing trades.
B. The probability of almost blowing up and losing 90% your account is 99.99% if you have 68 consecutive losing trades.
C. The probability of a humongous loss amounting to 80% of your account is 99.99% if you have 60 consecutive losing trades.
D. The probability of a massive loss amounting to 70% of your account is 99.99% if you have 53 consecutive losing trades.
E. The probability of a huge loss amounting to 60% of your account is 99.99% if you have 45 consecutive losing trades.
. . . So on and so forth.


There's only one way to know for sure and that's to ask them!


Risk management is a hotly debated topic and there are many different approaches to it. Until you are very confident of your own key stats based on live trading over a sustained period (preferably in different market conditions), always air on the negative side and be extremely cautious. (If you don't know what I'm refering to, then check out this Sticky: Essentials Of 'Risk & Money Management'.)

Cheers,
That sticky was a good read.

Increasingly, I'm of the view that risking even 1% on a single trade is too high and that the approach taken by traders like darktone is one that many people - especially newbies - would do well to emulate. In a nutshell, if I remember rightly, the Dax (which he trades) would have to suddenly drop 50% in value for him to have a blow up. And that will only ever happen if there's the mother of all Black Swan events that would probably mean the end of the financial system as we know it. It could happen, but his risk of ruin is smaller than the risk of him tripping over his own feet when getting out of bed and breaking his neck!
Tim.

Out of curiosity, how much would you typically deem to be the upper end of reasonable % risk per trade and per overall position?

Nowler, Risk Management is probably the most important element of a trading strategy, even with mediocre trading system, if your risk is set correctly you can still make money... There were even tests with random stocks selection and good risk management = to making money... There is nothing mysterious about it, what you need is data spawning few market cycles either form your trades or from back testing and from there you can calculate the optimal betting size for your trading strategy, one very smart man, Ed Thorp, suggested a half Kelly to be a very good conservative start for trading (where you are not sure of the future trading outcome)...

https://www.investopedia.com/articles/trading/04/091504.asp

Agree!
I am very thankful that I recognized the importance of good money/risk management. I would have never survived this long

I'm glad I read that bit about the Kelly Criterion. I had read something about it before but I believe I saw 75% being mentioned and immediately resulted in less of my interest. I'll take a closer look at it at some point. Doing half of the K Criterion might be a good start.

All this table shows is the number of trades before you hit a percentage loss, in the case of 100% it's 75 consecutive trades. But it's meaningless. Before you hit 15 consecutive losses you are most likely to have stopped trading the strategy anyway.

My guess this is a table provided by a broker or charting program, total BS!

What you need to be attempting to work out is the risk of ruin of the strategy itself, for that you need some complex maths or clever software and even then it could be wrong.

Maybe have a read of this article and see if it sparks any interest:

Fooled By Monte Carlo Simulation

The stats were taken from myfxbook (dot) com
I don't particular care about an accurate risk of ruin assessment, per se. If I limit my trade size to 2% and use stops then I will have plenty of time to identify that something isn't working (as you pointed out). I am not sure how reliable myfxbook are but they give me some other very interesting stats on my account. Though knowing that they can see my trades is a little weird...big brother is watching...

Thanks for the article mate.

 

[timsk]

. . .Out of curiosity, how much would you typically deem to be the upper end of reasonable % risk per trade and per overall position? . . .

Hi Nowler,
The answer to your question is a combo' of what your trading plan dictates and what you're comfortable with.

Trading Plan
This is arrived at through extensive testing, demo trading and, ultimately, trading live with the smallest amounts possible. For this, I recommend a micro account that let's you trade at just £0.10p per point. The point of doing this is that it'll generate your key stat's along with how many consecutive losing trades your methodology is likely to produce. For the sake of argument, let's say it's 10. Part of your plan will dictate what action you'll take if you get 11 or more. Fingers crossed it doesn't say to Martingale on the grounds that the 12th trade will be a runaway winner!

Comfort Zone
This is important because you have to think of the emotional state you'll be in after an extended losing streak. If you start to doubt yourself, your trading plan or anything else that will impact your performance - then you're risking too much. That's why I like darktone's approach as he trades in such small size that he doesn't give a flying toss if that trade is his 12th consecutive loser (in the context of this post) - or not. It's also the reason retail traders need a success ratio >50% and, preferably, >60%. Yes, it's possible to make money with a success ratio <40% but the psychological toll will be huge. Under these circumstances, sticking to your trading plan like poop to a blanket will be extremely tough. Too tough for the vast majority of retail traders.

To conclude, following the herd and doing what most people do or at least recommend - is probably wrong. That includes the Sticky I referenced (and wrote btw - thanks for the kind comment). Start with 1% per trade when testing, but don't feel you have to stick to that because that's the figure most commonly discussed. Who knows, perhaps for you, trading from your mobile mid way along a high wire 10000 feet up and going all in on every trade may be well within your risk tolerance.
Tim.

 

[Signalcalc]

I think that maximum drawdown should be added to this conversation as it also has a bearing. If you are risking 2% and you have 10 consecutive losers then drawdown will be around 20% plus costs. In the sphere of personal tolerance you also need to identify your own max DD level before taking some sort of action (stop the strategy).

Also linked is the win rate, if you know the probable win rate and you launch into a strategy that has consecutive losers then you may have launched just as the strategy hits a drawdown period, what action do you take then?

It can get more complex than this, but these are all basic items for a trading plan.

 

[darktone]

Increasingly, I'm of the view that risking even 1% on a single trade is too high and that the approach taken by traders like darktone is one that many people - especially newbies - would do well to emulate. In a nutshell, if I remember rightly, the Dax (which he trades) would have to suddenly drop 50% in value for him to have a blow up. And that will only ever happen if there's the mother of all Black Swan events that would probably mean the end of the financial system as we know it. It could happen, but his risk of ruin is smaller than the risk of him tripping over his own feet when getting out of bed and breaking his neck!
Tim.

Cheers Tim. Im a big fan of focusing on notional size and how it relates to your account when it comes to risk, and really thats about it. I dont like the standard view of RR, % per trade measured from entry to stop etc for a couple of reasons.
i) The standard 'wait for confirmation-take a position-stop out' executes on the side of pa that I dont want to be on.
ii) A stop is where you hope to get out not where you will get out. Any slippage is negative and if youre big enough at the wrong time it can be a killer.

If we take a £10k acc buying a 10k market, at a size that equal £1pp, I see that as 1/1 with a notional trade value of 10k, ignoring costs and reqs for the moment itd take the market to move to 0 for the acc to be wiped out. At £4pp I see that as 4/1 with a notional trade value of 40K. At this size it would take a 25% drop for the account to zeroed. I tarde dax at anything from sub 1/1 up to a max of 4/1. Anything over 3/1 for me is for very short periods, usually managing a position. Most often im 1/1 - 2/1.

If we take the average player who believes big is good and biggers better, hes got his signal and hits the short at £10pp the in the 10k market with his £10k acc. Initial stop is 10pts out (£10ppx10pts = £100... 1% of 10kacc), the first move was favorable so stops to BE and let profits run like a good trader should. The position briefly goes +150 but is still inside the channel hes marked perfectly on his charts, dont wana move stops up too soon like we did last time so gives it room to breath. As the market retraces he consoles himself knowing that the trade is risk free with stops at BE and win some lose some. It shaves the stop and turns back down, "Phew, maybe itll go my way after all".. then whamo, some fat finger-bomb found near christmas market-NPPR surprise bullsh!te-no reason on Gods green earth that I can goes down. He doesnt know where he is cos his screens have froze.. time passes time passes.. tick tick,, opens up his blotter to find -£1900 staring back and the real risk of the trade is revealed.

It doesnt have to be this dramatic ^ and of course it can be a sh!te pile worse, but far more likely the steady accumulation of neg slippage x size can consistently turn that '1% risk' into '1% + a bit more/quite a lot more/are ye feckin serious more' loss.

Jeez, what were we talking about again? Ill put my soapbox away

 

[brewski1984]

If we take the average player who believes big is good and biggers better, hes got his signal and hits the short at £10pp the in the 10k market with his £10k acc. Initial stop is 10pts out (£10ppx10pts = £100... 1% of 10kacc), the first move was favorable so stops to BE and let profits run like a good trader should. The position briefly goes +150 but is still inside the channel hes marked perfectly on his charts, dont wana move stops up too soon like we did last time so gives it room to breath. As the market retraces he consoles himself knowing that the trade is risk free with stops at BE and win some lose some. It shaves the stop and turns back down, "Phew, maybe itll go my way after all".. then whamo, some fat finger-bomb found near christmas market-NPPR surprise bullsh!te-no reason on Gods green earth that I can goes down. He doesnt know where he is cos his screens have froze.. time passes time passes.. tick tick,, opens up his blotter to find -£1900 staring back and the real risk of the trade is revealed.

Wondered why my ears were burning

Runs of consecutive losses and risk of (or actual) ruin is my area of expertise

 

[darktone]

Wondered why my ears were burning

Runs of consecutive losses and risk of (or actual) ruin is my area of expertise

Haha, no way mate! The brewski came, he saw, he added and added and he conquered!

 

[Signalcalc]

Cheers Tim. Im a big fan of focusing on notional size and how it relates to your account when it comes to risk, and really thats about it. I dont like the standard view of RR, % per trade measured from entry to stop etc for a couple of reasons.

i) The standard 'wait for confirmation-take a position-stop out' executes on the side of pa that I dont want to be on.

ii) A stop is where you hope to get out not where you will get out. Any slippage is negative and if youre big enough at the wrong time it can be a killer.



If we take a £10k acc buying a 10k market, at a size that equal £1pp, I see that as 1/1 with a notional trade value of 10k, ignoring costs and reqs for the moment itd take the market to move to 0 for the acc to be wiped out. At £4pp I see that as 4/1 with a notional trade value of 40K. At this size it would take a 25% drop for the account to zeroed. I tarde dax at anything from sub 1/1 up to a max of 4/1. Anything over 3/1 for me is for very short periods, usually managing a position. Most often im 1/1 - 2/1.



If we take the average player who believes big is good and biggers better, hes got his signal and hits the short at £10pp the in the 10k market with his £10k acc. Initial stop is 10pts out (£10ppx10pts = £100... 1% of 10kacc), the first move was favorable so stops to BE and let profits run like a good trader should. The position briefly goes +150 but is still inside the channel hes marked perfectly on his charts, dont wana move stops up too soon like we did last time so gives it room to breath. As the market retraces he consoles himself knowing that the trade is risk free with stops at BE and win some lose some. It shaves the stop and turns back down, "Phew, maybe itll go my way after all".. then whamo, some fat finger-bomb found near christmas market-NPPR surprise bullsh!te-no reason on Gods green earth that I can goes down. He doesnt know where he is cos his screens have froze.. time passes time passes.. tick tick,, opens up his blotter to find -£1900 staring back and the real risk of the trade is revealed.



It doesnt have to be this dramatic ^ and of course it can be a sh!te pile worse, but far more likely the steady accumulation of neg slippage x size can consistently turn that '1% risk' into '1% + a bit more/quite a lot more/are ye feckin serious more' loss.



Jeez, what were we talking about again? Ill put my soapbox away

I’m sure we were looking at the latest vinyl releases, what’s number 1 these days [emoji84]

 

[Signalcalc]

Wondered why my ears were burning

Runs of consecutive losses and risk of (or actual) ruin is my area of expertise

[emoji1360]

 

[Nowler]

Hi Nowler,
The answer to your question is a combo' of what your trading plan dictates and what you're comfortable with.

Trading Plan
This is arrived at through extensive testing, demo trading and, ultimately, trading live with the smallest amounts possible. For this, I recommend a micro account that let's you trade at just £0.10p per point. The point of doing this is that it'll generate your key stat's along with how many consecutive losing trades your methodology is likely to produce. For the sake of argument, let's say it's 10. Part of your plan will dictate what action you'll take if you get 11 or more. Fingers crossed it doesn't say to Martingale on the grounds that the 12th trade will be a runaway winner!

Lol, nope. No Martingale systems here

I can actually trade with less than a cent per pip with my current broker.
Typically my trades are €0.01 pp but might vary a little bit. This has been very important to me when it comes to testing new things out. I had a much smaller psych barrier as a result. I threw another little bit onto my account today in an attempt to combat my laxness which has been creeping in. I moved from a demo account to a mini account of €20 six months ago in order to work on my trading psychology, and it was greatly beneficial but I just cannot fully shake viewing this account as a glorified demo. I am trying to take this with 100% seriousness...to treat it as a business, or my families future but looking at a balance of €10 x 50:1 levers is kinda frivolous...kinda. Then again, I now I am not ready to move to a full live account...

Comfort Zone
This is important because you have to think of the emotional state you'll be in after an extended losing streak. If you start to doubt yourself, your trading plan or anything else that will impact your performance - then you're risking too much. That's why I like darktone's approach as he trades in such small size that he doesn't give a flying toss if that trade is his 12th consecutive loser (in the context of this post) - or not. It's also the reason retail traders need a success ratio >50% and, preferably, >60%. Yes, it's possible to make money with a success ratio <40% but the psychological toll will be huge. Under these circumstances, sticking to your trading plan like poop to a blanket will be extremely tough. Too tough for the vast majority of retail traders.

It's a pity myfxbook don't give me a stat for my consecutive lose/win rate.
I can see however that my win rate is currently 42%, which is decent when coupled with the right risk/reward ratios. This is not where I want to be though. At the very least, I want to get to a 50%. I can reevaluate once I get to that target. I don't get too stressed over a few consecutive losses, but I certainly do feel it. I have on a number of occasions questioned whether I have what it takes to succeed with trading, but I know this is quite a common thought in more than just trading. I just try to ensure each new trade is a fresh start, free from the result of the previous one...but that's not so easy at times

I am all for risking as little as you can (like Darktone) but at my level of capital it would take me forever to build up to anything worth getting excited over. That doesn't mean I will recklessly risk my account, but it does mean I have to take the elevated risk if I want to get to my target. I have already thought about this and what I came up with was to be careful and reduce risk as my account grows. Then again, 2% per trade is no 20% per trade. 2% still gives me breathing room but a 42% win rate makes it more stressful than it needs to be.

To conclude, following the herd and doing what most people do or at least recommend - is probably wrong. That includes the Sticky I referenced (and wrote btw - thanks for the kind comment). Start with 1% per trade when testing, but don't feel you have to stick to that because that's the figure most commonly discussed. Who knows, perhaps for you, trading from your mobile mid way along a high wire 10000 feet up and going all in on every trade may be well within your risk tolerance.
Tim.

My risk tolerance is not that high. We'll leave that to the invincible youngins

But yes, I'll move things around so that I get a tighter fit to my personality.

 

[Nowler]

I think that maximum drawdown should be added to this conversation as it also has a bearing. If you are risking 2% and you have 10 consecutive losers then drawdown will be around 20% plus costs. In the sphere of personal tolerance you also need to identify your own max DD level before taking some sort of action (stop the strategy).

Also linked is the win rate, if you know the probable win rate and you launch into a strategy that has consecutive losers then you may have launched just as the strategy hits a drawdown period, what action do you take then?

It can get more complex than this, but these are all basic items for a trading plan.

Good points mate.

My drawdown is currently 56% or something... I had lost 60+% of my account at one stage. I would like to get back to breakeven so that DD figure isn't so high. It's depressing to look at.

Losing 10 straight trades is very possible for me and 20% drawdown from 10 trades is a lot! I can't actually remember the last time I lost 10 in a row though... but it's smart to based my plan off how much I would be ok with losing should I hit a 10 trade losing streak. I think I might reduced it to 1% and only add on pullbacks. My current win rate is 42%, but this is muddied by all the losses in the first 2 months when I had less of an idea of what I was doing. I have no "last month" tab on my account stats but I do have a "this month". However, it's the 3rd of Dec, so a bit too early to use it


EDIT: I can actually see how much the difference between last and current month. So I actually had a 34% or so wn rate last month... oops

 

[Nowler]

Cheers Tim. Im a big fan of focusing on notional size and how it relates to your account when it comes to risk, and really thats about it. I dont like the standard view of RR, % per trade measured from entry to stop etc for a couple of reasons.
i) The standard 'wait for confirmation-take a position-stop out' executes on the side of pa that I dont want to be on.
ii) A stop is where you hope to get out not where you will get out. Any slippage is negative and if youre big enough at the wrong time it can be a killer.

If we take a £10k acc buying a 10k market, at a size that equal £1pp, I see that as 1/1 with a notional trade value of 10k, ignoring costs and reqs for the moment itd take the market to move to 0 for the acc to be wiped out. At £4pp I see that as 4/1 with a notional trade value of 40K. At this size it would take a 25% drop for the account to zeroed. I tarde dax at anything from sub 1/1 up to a max of 4/1. Anything over 3/1 for me is for very short periods, usually managing a position. Most often im 1/1 - 2/1.

If we take the average player who believes big is good and biggers better, hes got his signal and hits the short at £10pp the in the 10k market with his £10k acc. Initial stop is 10pts out (£10ppx10pts = £100... 1% of 10kacc), the first move was favorable so stops to BE and let profits run like a good trader should. The position briefly goes +150 but is still inside the channel hes marked perfectly on his charts, dont wana move stops up too soon like we did last time so gives it room to breath. As the market retraces he consoles himself knowing that the trade is risk free with stops at BE and win some lose some. It shaves the stop and turns back down, "Phew, maybe itll go my way after all".. then whamo, some fat finger-bomb found near christmas market-NPPR surprise bullsh!te-no reason on Gods green earth that I can goes down. He doesnt know where he is cos his screens have froze.. time passes time passes.. tick tick,, opens up his blotter to find -£1900 staring back and the real risk of the trade is revealed.

It doesnt have to be this dramatic ^ and of course it can be a sh!te pile worse, but far more likely the steady accumulation of neg slippage x size can consistently turn that '1% risk' into '1% + a bit more/quite a lot more/are ye feckin serious more' loss.

Jeez, what were we talking about again? Ill put my soapbox away

Thanks for the explanation mate

Do you or any of the rest of you know what the average slippage size is in fx? And how often slippage occurs, on average for say...the major pairs only, if that makes it easier.

 

[Signalcalc]

Good points mate.

My drawdown is currently 56% or something... I had lost 60+% of my account at one stage. I would like to get back to breakeven so that DD figure isn't so high. It's depressing to look at.

Losing 10 straight trades is very possible for me and 20% drawdown from 10 trades is a lot! I can't actually remember the last time I lost 10 in a row though... but it's smart to based my plan off how much I would be ok with losing should I hit a 10 trade losing streak. I think I might reduced it to 1% and only add on pullbacks. My current win rate is 42%, but this is muddied by all the losses in the first 2 months when I had less of an idea of what I was doing. I have no "last month" tab on my account stats but I do have a "this month". However, it's the 3rd of Dec, so a bit too early to use it


EDIT: I can actually see how much the difference between last and current month. So I actually had a 34% or so wn rate last month... oops

I think most traders would consider 60+% DD, 42% or worse 34% win rate to be a very poor strategy and not worth trading.