MONEY MANAGEMENT
About Risk Of Ruin
Here is a formula for calculating risk of ruin that can be used to make intriguing mathematical projections of the forex gambit.
In my previous article, I presented the forex gambit. I made some suggestions for systems and analysis and presented some results that were intriguing. But is that all that can be said about the subject? Hardly! In this article, I will discuss risk, the essential language of money. Here’s a possible formula for calculating risk of ruin, and then I’m going to use that formula to make some mathematical projections for the forex gambit.
I will start by defining risk of ruin (Ror). In its simplest form, Ror is the probability of an account going to zero given various variables.
In his 1992 Stocks & Commodities article “Appreciating The Risk Of Ruin,” Nauzer J. Balsara suggested that the variables for calculating Ror should be:
Nauzer then ran several simulations and produced some tables listing the various probabilities of Ror, given the input variables mentioned.
The ROR formula
The formula produces results similar to Balsara’s tables but is just a bit more pessimistic. If his tables gave an Ror probability of 77%, the formula I would suggest would give an Ror probability of about 79%.
This formula was created by technicians Teresa Lo and Michael J. Friesen. The formula suggests using six variables: