Risk of Ruin Help

Can someone please show me the simple math for this formula?

risk_of_ruin = ((1 – Edge)/(1 + Edge)) ^ Capital_Units

I can't get the numbers to come out properly. I would really appreciate it if someone would break it down for me step by step.

Let's say I have a 2:1 risk/reward ratio and I win 35% of the time. Each trade I risk 10% of my capital. The chart says I have a 60.8% chance of losing all my capital. Problem is I have no clue how this is calculated and can't find anywhere to explain it simply. Everyone assumes I know what EDGE and Capital_Units are and I don't.

Here's where I see the chart: http://2ndskiesforex.com/trade-signa...-risk-of-ruin/

Please someone help me before I lose my mind over here.

Merry Christmas Ya Filthy Animals

A quick google.

There are a number of ways to calculate Risk of Ruin, however the most common formula is:
Risk of Ruin = (1-(W-L))/(1+(W-L))^ U (Where W=Probability of winning, L+ Probability of Losing, ^ denoted the power of U + Number of Maximum Risk Trades that may be taken).

Here is an example of trader A with a $50,000 account and is willing to Risk a Maximum drawdown of 30%, which is a Point of Ruin at -$15,000. Lets assume Trader A has proven through his trading that he can gain the following averages: Win% = 60%, Loss% = 40%, Risk per trade is 1% of full account at $500 so max trades he may take and lose sequentially is 30 trades before he reaches the Point of Ruin (Max Drawdown).
So his Risk of Ruin is worked out as follows:
(1-(0.2)/1+(0.2))^30 =

(0.8/1.2)^30 =M

(0.666666)^30 = 0.000005214 = 0% (When rounded down).

This fails to take into account the risk reward ratio. It assumes a 1:1. I've seen this calculation. I have exhausted Google to try to find a good explanation. Based on this iteration you've shown, there is no way to solve the sample scenario I showed above or to create a chart like in the link.

Still looking....

here you go. https://www.dukascopy.com/fxcomm/fx-...67&language=en

This doesn't use the formula I posted. Im trying to figure out this formula risk_of_ruin = ((1 – Edge)/(1 + Edge)) ^ Capital_Units as reference here: http://2ndskiesforex.com/trade-signa...-risk-of-ruin/

Both are esscentailly the same

Luther, thank you for the explanation. The numbers I gave you were sample based on the chart from the link. I am merely trying to figure out how to calculate using the formula. Its not even a trade matter anymore. I have been very successful trading and using super strict money management. I stumbled on this calculation and I hate not knowing how the calculation works out. Its my math pet peeve.

Thanks

I've got to know how to use this exact formula. Its about understanding it now instead of working around it. I'm losing my mind because I cant figure out this specific formula not how to manage money.

These should help.

Money Management Strategies For Futures Traders

The Handbook of Portfolio Mathematics

Here's the problem I am having. Where does the risk reward factor into this equation?

Risk of Ruin = ((1 - Edge)/(1 + Edge)) ^ Capital Units

Edge is the probability of a win.
Capital Units = are the units of capital, that means the number of consecutive losing trades needed to get to the point of stop trading

The risk reward plays into this and I'm not quite sure where.

Still looking for help on this if anyone can help. Just looking for help on getting the equation to work