©Trading-Research.

com - by Roberto Ambrogi - attached to the article "Calculate your Risk of Ruin"
www.Trading-Research.com/english

CALCULATE YOUR RISK OF RUIN

This is the calculation according to the Kaufman formula:

in these boxes please put your methodology values

in these boxes will be returned the results (so they have not to be compiled)

(some numbers have been included only as an example)

TOTAL INITIAL CAPITAL 10,000.00 $

% YOU ARE WILLING TO RISK 30 % usually it is reasonable to place it 0.3

(Max Risk %) at around 25-30% of the initial capital;
it represents the level at which it is appropriate to
stop and re-evaluate the methodology
to make the appropriate adjustments

W=winning probability 60 % 0.6

U=Number of consecutive losing trades to get to the point of "STOP TRADING"; it is calculated considering the RISK PER TRADE

RISK PER TRADE 200.00 $ it is the maximum possible loss

on the single trade (stop loss)

U= 15 (*)

Risk of Ruin = (1-Edge) ^U =

0.00000000093132257 in % 0.00000009313226 %
(1+Edge)

The optimal value is between 0 and 0.5% and better as close as possible to zero (in this example it is good); notice
how it improves as you increase the initial capital value and/or decrease the risk per trade and obviously when
you increase W. However as said in the article this formula is quite incomplete and reductive it's better
to use the Ralph Vince formula

Here will be considered more parameters:

W = Probability of win (%) 60 % 0.6

L = Probability of Loss (%) 40 % 0.4

AW= Average Winning Trade ($) 300 $

AL=Average Losing Trade ($) 200 $
C= Total initial capital 10,000.00 $
Max Risk % (% of initial equity we want to risk) 30 % 0.3

Average Win % = Average Win/Total Initial Capital 0.03

Average Loss %=Average Loss/Total Initial Capital 0.02

Z = (W*Average Win%)-(L*Average Loss%) 0.010

A = [W*(Average Win%)^2-+L*(Average Loss%)^2]^(1/2) 0.0264575131

P = 0,5*(1+Z/A) 0.6889822365

Max Risk
0.00012113600661 0.01211360066099 %
Risk of Ruin = (1-P) ^ A =
P

(*) Calculation of U:

TOTAL INITIAL CAPITAL 10,000.00 $

MAX RISK % 30 % 0.3

RISK PER TRADE (Stop loss per trade) 200.00 $

U = (TOTAL INITIAL CAPITAL * Max Risk %)/Risk per Trade 15

ER TRADE