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Risk of Ruin Quiz
Assuming the following scenario:
1) account size $500
2) loosing trade $50 (10%)
3) winning trade $100 (20%)
4) ratio of #winners/#loosers 2:3
What are the chances of going broke?
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The system above is a very good winning system with +$50 expectation over every 5 trades. Over each 100 trades it will show $1000 profit on average (over the long term). Each 500 trades will result in $5000 profit on average.
Now, this is assuming we can withstand the drawdown... which was the tricky part of this quiz. I've run 10,000 simulations for 100 and 500 trade scenarios, showing the lowest equity level reached for both:
Forecast: MIN over 100 trades
Percentile Value
10% -500
20% -350
30% -250
40% -200
50% -150
60% -100
70% -50
80% -50
90% 50
As you can see there is 10% or more chances of equity hitting -$500 and 20% or more - of equity hitting -$350. If we assume our account is not tradable after equity hits -$450, the exact percentage is 12.15%
Forecast: MIN over 500 trades
Percentile Value
10% -550
20% -400
30% -300
40% -200
50% -150
60% -100
70% -50
80% -50
90% 50
As you can see there is 10% or more chances of equity hitting -$550 and 20% or more - of equity hitting -$400. If we assume our account is not tradable after equity hits -$450, the exact percentage is 13.78%
The main point was to illustrate the reltively high chances even for the winning system to go broke in because of the bad risk management.
Food for thought, SimSpeed?
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