Risk of Ruin: Why '% Profitable' Is the Wrong Metric

Here's a number that should bother you more than it does: a trading strategy can show "95% of simulations profitable" and still be one that blows up real accounts. The gap between those two facts is the difference between where a path ends and what it does along the way — and it's where a lot of traders quietly get wiped out.

The metric that hides the danger

When you run a Monte Carlo on your trades, the headline number is usually "% of simulations that ended profitable." It feels like a safety rating. It isn't.

Consider a simulated path that starts at $20k, draws all the way down to -$15k, then recovers and finishes at +$10k. By the "% profitable" metric, that's a win. In reality, you'd have hit a margin call at -$15k and been liquidated long before the recovery. The simulation counts a profit on a path you'd never have survived to see.

This isn't a corner case. Strategies with occasional deep drawdowns — which is most of them — routinely have a meaningful fraction of paths that end fine but pass through account death. A metric that only looks at the endpoint is blind to exactly the risk that matters.

Path-dependent risk: the right question

The honest question isn't "what fraction of paths end profitable?" It's:

What fraction of paths would have busted my account at any point along the way — even if they later recovered?

This is called path-dependent, or path-aware, risk. It tracks the lowest point each simulated path reaches relative to your actual account size, and counts a path as "ruined" the moment it crosses your bust threshold — regardless of where it ends up.

The difference in practice is stark. A strategy might be "92% profitable" by the weak metric and have a 30% risk of ruin at a $20k account by the path-aware metric. Same strategy, same simulation — wildly different conclusions about whether you should trade it at that size.

Why account size changes everything

Risk of ruin is meaningless without an account size, because ruin is defined relative to your capital. The same edge that has a 2% risk of ruin at $100k can have a 40% risk of ruin at $10k — because the same dollar drawdown is survivable in the first case and fatal in the second.

This is the practical link between your statistics and your sizing. A strategy isn't "safe" or "risky" in the abstract. It's safe or risky at a given account size. Knowing your path-aware risk of ruin at the size you actually trade is one of the few numbers that should directly change your behaviour.

How to use it

1. Stop reading "% profitable" as a safety score. It's a measure of central tendency, not survival.
2. Always evaluate risk at your real account size, not in the abstract.
3. Look at the worst paths, not the average path. The average path never bankrupts anyone; the tail does.
4. If your path-aware risk of ruin is uncomfortably high, the fix is size, not hope. Trading the same edge smaller can move a 30% ruin risk down to single digits without changing the edge at all.

The bottom line

Most blow-ups aren't caused by a bad edge. They're caused by a fine edge traded at a size that couldn't survive its own normal drawdowns. "% profitable" will never warn you about that. Path-aware risk of ruin, measured at your actual account size, is the number that will.

NoxarQuant's Monte Carlo reports path-aware risk of ruin at your account size — the fraction of simulated paths that would have busted you at any point, not just where they ended. Descriptive analysis of your own trades, not financial advice. See your risk.