1. UNABLE TO BURN ACCOUNT: LOSS RATE

This is easy. That is the percentage of losing orders over total entries. Remember the loss rate, not the win rate, as we need to evaluate the likelihood of losing more. This is an important number you need to know in capital management, and for the trade to not burn the account.

Basically, this loss rate will not determine too much on your profits, because if the loss rate is large, you can compensate by making more profit on each winning order (profit-loss ratio).

Aim for trading systems for a 50-60% loss rate. That is the best number to trade without burning your account. If the loss rate is higher than 60%, the likelihood of account fire will be higher because you will have to accept very heavy drawdowns (imagine losing 7-8 orders in 10 orders, and the odds of losing 70-80 %, heavy drawdown affects psychology).

If the loss rate is lower than 50%, the chance of having a margin of profit is not good, because then each winning order will be smaller.

2. UNABLE TO BURN THE ACCOUNT: ORDER VOLUME

This is the key factor. If you know this factor then, the likelihood of account fire will decrease to very low. Most of the account fire is due to the large order volume only.

Calculate your order size so that each loss only accounts for 1-2% of your account.

With 2% risk, you will have to lose 50 consecutive orders to burn your account. This is almost impossible (because tossing a coin will have a 50% win rate already)

Trading is risky because you are too big. If you follow this rule, the risk of losing all your assets (bankruptcy) is close to zero.

To comply with this rule it is imperative to place a stop loss before entering an order. The stop loss is an automatic stop order. There is no "stuck order", because those who are stuck on orders do not stop losing.

This is easy that a lot of people do not.

3. UNABLE TO BURN THE ACCOUNT: RISK OF RUIN

Bankruptcy is when? That is when people's accounts drop to the point where they cannot recover from the original, not necessarily all burn, sometimes a 70-80% drop is already considered bankrupt.

Based on the following 2 tables to calculate the risk of ruin:

The possibility of having X consecutive losing orders in a series of 100 orders:


% Profit needed to be earned to recover based on drawdown:


A system with 60% win-rate has 1% chance of 10 consecutive losing orders in 100 orders, if the risk is 2%, the drawdown will be 20%, so it takes 25% of profit to break even. This system has a close to zero risk of ruin.

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