A trader\'s money management system

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Using Risk-of-Ruin Tables and the OptimalfFormula 77

Nauzer Balsara,Money Management Strategies for Futures Traders,

John Wiley & Sons, 1992, has the following risk-of-ruin tables:

 10 percent capital at risk


 20 percent capital at risk


 25 percent capital at risk


 33.33 percent capital at risk


 50 percent capital at risk


 100 percent capital at risk

A small portion of Balsara’s 10 percent risk-of-ruin table (see Table 9.1)

is included in this chapter, with the author’s permission. By far, Balsara’s

risk-of-ruin tables are the most comprehensive you will find. His book is an

essential reference for determining your risk exposure based on your win

ratio and payoff ratio.

It is quite revealing to see how your probabilities in these tables can go

from 100.0 percent likely chance of ruin to 0.0 percent. So with a little plan-

ning and thought, you can dramatically increase your odds of survival just

by having respect for the ROR formula. You do not need to be a mathemati-

cal genius and you don’t need to know how to do the calculations yourself,

just understand the principles and the impact that your risk choices make.

Keeping in mind that the past does not necessarily predict the future,

it is imperative that you constantly monitor your current win ratios and

TABLE 9.1 Risk of Ruin (ROR) Probabilities with 10% of Capital at Risk

Risk of Ruin

Probabilities with

10% of Capital at Risk

Payoff

Ratio

1To1

Payoff

Ratio

2To1

Payoff

Ratio

3To1

Payoff

Ratio

4To1

Payoff

Ratio

5To1

Win Ratio 25% 100.0% 100.0% 99.0% 30.3% 16.2%

Win Ratio 30% 100.0% 100.0% 27.7% 10.2% 6.0%

Win Ratio 35% 100.0% 60.8% 8.2% 3.6% 2.3%

Win Ratio 40% 100.0% 14.3% 2.5% 1.3% 0.8%

Win Ratio 45% 100.0% 3.3% 0.8% 0.4% 0.3%

Win Ratio 50% 99.0% 0.8% 0.2% 0.1% 0.1%

Win Ratio 55% 13.2% 0.2% 0.1% 0.1% 0.0%

Win Ratio 60% 1.7% 0.0% 0.0% 0.0% 0.0%

A 0.0% probability means the total loss of equity is unlikely, but not impossible.

Source: The calculations on this table were prepared by Professor Nauzer Balsara.

For additional calculations and reference tables on the risk of ruin, refer to his

book,Money Management Strategies for Futures Traders, John Wiley & Sons, 1992,

starting on page 18. This book has, by far, the most extensive set of ROR tables

and formulas available.