Calculate your risk of Drawdown and Ruin
As a futures broker specialised on trading systems, we offer a couple of options for our clients: ready-to-trade systems or execution of your own trading system. It can also be useful to evaluate a trading system performance and risk.
The risk of ruin and drawdown calculator below is a basic tool to help evaluate a simple system performance. Do not forget to subscribe to our newsletter to receive any new tools and articles we publish for trading systems (form on the right-hand side), or contact us for more info on our systems or how we can help with execution.
Below is a calculator that implements risk of ruin or risk of drawdown calculations based on the two methods described thereafter (the risk of ruin is calculated from both a Monte-Carlo simulation and from the formula).
Just fill in the stats of the trading system, the test length and the level of drawdown/ruin to be tested and hit the Calculate button.
How to interpret the results
Risk of ruin is different from risk of drawdown. Ruin is usually defined as a fixed capital level, representing a large percentage loss on initial capital. For example, a risk of ruin at 45% is the probability that your initial capital falls to 55% of what you started with. As the equity grows, the risk of hitting that “ruin threshold” decreases.
Risk of drawdown, on the other hand, stays constant regardless of how high the equity grows, because the drawdown “capital barrier” keeps moving up in line with the equity.
- The two first fields (probability of win and win/loss ratio) represent the system performance characteristics. In the default example set above, the system generates 40% of winners, with winners generating on average 1.8x the size of losers.
- The third field represent the percentage of capital risked ob every trade. The risk of ruin/drawdown is highly correlated to this value.
- The “Periods” field represents the time horizon over which the simulation is run (i.e. to estimate risk of ruin/drawdown over 100 periods for example). A longer period would increase the risk of drawdowns (and potentially ruin too).
- “Loss Level” defines the level at which the drawdown or risk of ruin is set for the test (45% means that ruin/drawdown is defined as loss of 45% capital).
The risks of ruin and drawdown are estimated via a Monte-Carlo simulation and as such are not exact values. The MC process works by iterating a random process governed by characteristics such as probability of win, payoff ratio, percentage of capital risked on each trade. With the default input values, the risk of drawdown is defined at around 25%. This means that with the given system (prob. win = 40% and win/loss ratio = 1.8), the risk of reaching a drawdown of 45% over 100 periods is around 25% when risking 4% capital per trade.
The tool is useful to check that decreasing risk per trade to 3% reduces the chance of drawdown to around 9%. On the other hand, increasing risk per trade to 5% increases the chance of drawdown to around 45%. The risk of drawdown also increases with number of periods tested (ultimately, risk of drawdown tends to 100% for any system). Doubling the number of periods to 200 for the default values increases the chance of 45% drawdown to around 52%.
We offer our clients several proprietary trading systems, with strategies ranging from long-term trend following to short-term mean-reversion. We also provide full execution services for a fully automated strategy trading solution.
Please click on the picture below to see our trading systems performance.
State of Trend Following report
The Wisdom State of Trend Following reports the performance of a composite index made up of classic trend following systems simulated over multiple timeframes and a portfolio of futures, selected from the range of 300+ futures markets over 30+ exchanges that Wisdom Trading can provide clients access to. The portfolio is global, diversified and balanced over the main sectors.
We publish updates to the report every month. Subscribing is the best way to keep track and follow the performance of trend following on a regular basis.
Commodity Trading involves substantial risk of loss and is not suitable for all investors. Any performance results listed in all marketing materials represents simulated computer results over past historical data, and not the results of an actual account. All opinions expressed anywhere on this website are only opinions of the author. The information contained here was gathered from sources deemed reliable, however, no claim is made as to its accuracy or content. Different testing platforms can produce slightly different results. Our systems are only recommended for well capitalized and experienced futures traders.
CFTC-required risk disclosure for hypothetical results
Hypothetical performance results have many inherent limitations, some of which are described below. No representation is being made that any account will or is likely to achieve profits or losses similar to those shown. in fact, there are frequently sharp differences between hypothetical performance results and the actual results subsequently achieved by any particular trading program.
One of the limitations of hypothetical performance results is that they are generally prepared with the benefit of hindsight. In addition, hypothetical trading does not involve financial risk, and no hypothetical trading record can completely account for the impact of financial risk in actual trading. For example, the ability to withstand losses or to adhere to a particular trading program in spite of trading losses are material points which can also adversely affect actual trading results. There are numerous other factors related to the markets in general or to the implementation of any specific trading program which cannot be fully accounted for in the preparation of hypothetical performance results and all of which can adversely affect actual trading results.