I'm reading a book titled "A Trader's Money Management System" and it discusses risk of ruin(ROR) tables. It says that you can have a zero probability of ROR with a payoff ratio of 2 to 1 and a win rate of 60%.
- My understanding is that the concept of ROR originated in gambling, but is it applicable to trading and more importantly, does it work in real world trading?
- The book says a zero percent probability of ROR means that ruin is extremely unlikely, but not impossible. Doesn't that go against the definition of a zero percent probability?
How do you calculate ROR? The book only includes a sample table. I googled it and this came up.
((1 - Edge)/(1 + Edge)) ^ Capital_Units
How do you fit the payoff ratio and the win rate into the edge?