Encyclopedia · risk · sizing
Probability of ruin
The chance that an equity path touches a loss threshold you cannot or will not survive.
Probability of ruin reframes risk as a survival question: across simulated futures, in what fraction does equity touch the ruin threshold — a margin call, a prop-firm loss limit, or simply the point where you would stop trading? Unlike volatility, it is path-dependent: it cares whether losses cluster early, not just how large they are on average.
It is the tail number most sensitive to position size. Because losses compound against a shrinking base, ruin probability rises sharply — not proportionally — with leverage, which is why sizing frameworks (fractional Kelly, per-strategy risk caps) treat it as the binding constraint rather than a curiosity.
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