Risk of ruin with tiny edges and big size
A scalping system with a small edge per trade can look safe because of the high win rate. But combined with large size relative to the account, the risk of ruin can be significant. A win rate of 65 percent with an average win of 3 pips and an average loss of 6 pips has a thin expectancy, and a single bad streak can be devastating.
The math is accessible. Given win rate, payoff ratio, and risk per trade, a simulation estimates the probability of a drawdown of a given size or of ruin over a given number of trades.
A common finding is that risk per trade must be much smaller than intuition suggests. For a thin edge, 0.25 to 0.5 percent per trade may be appropriate, not 2 percent.
Also include execution costs. A system with a small edge before costs may have no edge after them, making ruin certain given enough time.
Run the simulation with pessimistic inputs: lower win rate, higher costs. If ruin probability is meaningful, the size is wrong.
What does the ruin simulation say about the current risk per trade?
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Risk of ruin with tiny edges and big size
Risk of ruin with tiny edges and big size
It’s Fairman 
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Amanhasnoname
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Re: Risk of ruin with tiny edges and big size
A friend of mine blew an account with exactly this profile, a 70 percent win rate with small winners and a 2 percent risk per trade, so I ran the numbers on my own system afterwards. My results were a 62 percent win rate, average win 4 pips and average loss 5.5 pips, with costs of 0.8 pip per trade. After costs the edge was almost nothing, and the simulation showed about a one in five chance of a 30 percent drawdown inside 500 trades at 1.5 percent risk.
Cutting the risk to 0.4 percent per trade brought that chance down to under 2 percent, but also made the profit very slow, which forced me to face whether the strategy was worth running at all. I ended up keeping it only on the two pairs where my spread was smallest.
I would add that the inputs should come from live fills, not a backtest. When I replaced my tested win rate with the live one, which was four points lower, the ruin estimate roughly doubled.
Cutting the risk to 0.4 percent per trade brought that chance down to under 2 percent, but also made the profit very slow, which forced me to face whether the strategy was worth running at all. I ended up keeping it only on the two pairs where my spread was smallest.
I would add that the inputs should come from live fills, not a backtest. When I replaced my tested win rate with the live one, which was four points lower, the ruin estimate roughly doubled.