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 steady below 1.0800 after US PCE meets expectations
EUR/USD remains depressed below 1.0800 after soft French inflation data, amid minimal volatility and thin liquidity on Good Friday. The pair barely reacted to US PCE inflation data, with the Greenback shedding some pips. Fed Chair Jerome Powell set to speak ahead of the weekly close.
GBP/USD hovers around 1.2620 in dull trading
GBP/USD trades sideways above 1.2600 amid a widespread holiday restraining action across financial markets. Investors took a long weekend ahead of critical United States employment data next week. Fed Chair Powell coming up next.
Gold price sits at all-time highs above $2,230
Gold price holds near a fresh all-time high at $2,236 in thinned trading amid the Easter Holiday. Most major world markets remain closed, although the United States published core PCE inflation, the Federal Reserve’s favorite inflation gauge.
Jito price could hit $6 as JTO coils up inside this bullish pattern
Jito (JTO) price has been on an uptrend since forming a local bottom in early January. Since then, JTO has revisited the key swing point formed in early December, suggesting the bulls’ intention to move higher.
Key events in developed markets next week
Next week, the main focus will be inflation and the labour market in the Eurozone. We expect services inflation to be impacted by the easter effect, while the unemployment rate to be unchanged.
RECOMMENDED LESSONS
Making money in forex is easy if you know how the bankers trade!
Discover how to make money in forex is easy if you know how the bankers trade!
5 Forex News Events You Need To Know
In the fast moving world of currency markets, it is extremely important for new traders to know the list of important forex news...
Top 10 Chart Patterns Every Trader Should Know
Chart patterns are one of the most effective trading tools for a trader. They are pure price-action, and form on the basis of underlying buying and...
7 Ways to Avoid Forex Scams
The forex industry is recently seeing more and more scams. Here are 7 ways to avoid losing your money in such scams: Forex scams are becoming frequent. Michael Greenberg reports on luxurious expenses, including a submarine bought from the money taken from forex traders. Here’s another report of a forex fraud. So, how can we avoid falling in such forex scams?
What Are the 10 Fatal Mistakes Traders Make
Trading is exciting. Trading is hard. Trading is extremely hard. Some say that it takes more than 10,000 hours to master. Others believe that trading is the way to quick riches. They might be both wrong. What is important to know that no matter how experienced you are, mistakes will be part of the trading process.