In this episode of Truth About FX, Walter cracks the shell of probably one of the most common questions, especially for newbie traders: What is risk of ruin? And, more importantly, why should you really car about this.
He talks about its relevance to understanding your trading limitations and making this an important tool in making your own trading system.
Download (Duration: 02:40 / 3.06 MB)
In This Episode:
00:28 – why should I care?
01:56 – the best skill
02:18 – not so sexy
Announcer: Sometimes, forex trading is a wild and wooly place to be. That’s why Hugh is here, to post your questions to Walter, the naked forex guy. Hugh’s got questions and Walter’s got the answers. Here at the Truth About FX Podcast.
Hugh: Hi, Walter. As a trader, what is risk of ruin and why should I care?
Walter: This is such a great question. The main reason why is because the risk of ruin and the risk of drawdown — which is related to the risk of ruin — is probably your most important number.
Most people are going to look at win rate, most people are going to look at return or profit factor, or how many trade I can take in the next four hours or whatever. But, really, the risk of ruin is why people blow up their accounts. It’s why they lose everything, it’s why they freak out, it’s why they hurt themselves or worse, it’s why trading sucks for a lot of people.
It’s because they don’t have a grasp of what’s the risk of ruin is. I’ll post in the show notes here. I’ve done this before but I want you guys to have a video on the risk of ruin and the calculator.
You can use it, check it out, play with it, figure out how it works. The point is you need to know when you go into trading a system live, you need to know where is it that I’m going to say, “Hey! This is it. I’m done. I quit. I’ve lost too much money”.
Once you know what that is, you can set yourself up so that you don’t go through those really difficult times. If you sat down and said, “Okay, I am going to figure out this trading thing,” and there was one where you’d said, “What’s the one thing I need to know?,” it would be the risk of ruin.
The concept of risk of ruin and understanding how that works with your trading system and how your position sizing and all that is related to risk of ruin, risk or drawdown. If you can grasp that one thing, that is probably the best skill that you need in order to trade.
I know people think it’s the right entry and it’s the London Explosion System and all that. No, it’s not. It’s risk of ruin. Risk of ruin is what’s going to help you do this for a long time in many years, basically. That’s why you should care, basically. It’s the most important number. It’s the most important trading concept.
Hugh: Awesome! It’s not so sexy but it’s going to get you through, right?
Walter: Exactly. You’ve got it.
Hugh: Alright. Thanks, Walter.