Trading Risk Glossary
Key terms in risk of ruin analysis, position sizing, and Monte Carlo simulation for traders.
Risk of Ruin
The probability that a trader will lose enough capital to be unable to continue trading, calculated based on win rate, position size, and risk-reward ratio.
Full definitionKelly Criterion
A formula that determines the theoretically optimal bet size to maximize long-term growth rate, based on win probability and payoff ratio.
Full definitionMonte Carlo Simulation
A computational method that runs thousands of randomized trade sequences to model the range of possible outcomes for a trading strategy, revealing best-case, worst-case, and median scenarios.
Full definitionPosition Sizing
The process of determining how many shares, contracts, or units to trade based on account size, risk tolerance, and the distance to a stop-loss level.
Full definitionDrawdown
The peak-to-trough decline in a trading account's value, expressed as a percentage from the highest point to the lowest point before a new high is reached.
Full definition