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?


closed as off topic by Tal Fishman, Joshua Ulrich, Steve Severance, vonjd, chrisaycock Oct 7 '11 at 12:40

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  • 2
    $\begingroup$ possible duplicate of How to estimate the probability of drawdown / ruin? $\endgroup$ – Joshua Ulrich Oct 7 '11 at 1:18
  • 1
    $\begingroup$ Hi Tom, welcome to quant.SE. I could be wrong, but I have never heard of professional quants using such oversimplified "money management" techniques. I believe your question is off topic. $\endgroup$ – Tal Fishman Oct 7 '11 at 1:39
  • $\begingroup$ Discussion of why this question was closed on meta. $\endgroup$ – Tal Fishman Oct 7 '11 at 15:30

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