How Good is your trading strategy? Find out what your probability of “Ruin” is.
(Excel spreadsheet below available for download. No macros, no VBA.)
HERE’S THE FIRST WAY (which does NOT rely upon win % to calculate).
David E. Chamness had an article in Futures magazine (August 2009) entitled, “Minimizing Your Risk of Ruin”, and his formulas are independent of win%.
We will plug in our values….
- Percent of the account that we are willing to lose and define as “ruin”, (let us say 50%). Some folks prefer to use 30% as their definition of ruin.
2. The Average of all our Monthly Returns (gains and losses) in percent, say 7.68%.
3. The Standard Deviation of all our Monthly Returns (gains and losses) in percent, say 11.6%.
Excel Formula: EXP((-2*(Average of Monthly Returns)*Percent of the account that we are willing to lose and define as “ruin”)/(Standard Deviation of Monthly Returns*Standard Deviation of Monthly Returns))
example with values from above entered: EXP((-2*(.0768)*0.50) / (0.116 * 0.116)) = 0.34% RISK OF RUIN
HERE’S ANOTHER WAY TO CALCULATE RISK OF RUIN using other trade data:
Nauzer J. Balsara’s text, Money Management Strategies for Futures Traders, (John Wiley, 1992) presents a widely respected formula.
And Brent Penfold’s book, The Universal Principles of Successful Trading, presents the same formula very well.
The Equation: ((1-(%Win-%Losses))/(1+(%Wins-%Losses)))^(RiskCapital/Max Loss). This formula is easily plugged into Excel.
Example: Assuming %Win = .59 and %Losses = (1-.62) = 0.41, Risk Capital = $50,000, Max Loss = Historic Max Loss To Date = $6,050
Equation: ((1- (.59 – .41)) / (1+ (.59 – .41)))^(50,000/6,050)
= 4.94% RISK OF RUIN
DOWNLOAD EXCEL EXAMPLE: (NO VBA, NO MACROS) here……………
contact us at:
therivertradingsystem@gmail.com
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