The risk of bankruptcy does not necessarily mean that your account balance is zero, it may be a 50%, 75%, or 100% account loss, depending on your personal risk tolerance. Your bankruptcy point is the financial boundary you built during the preparation stage, or the risk capital you prepared.

If the probability is too high, you must try to reduce it. If you can reduce your probability of bankruptcy to an acceptable level, then you have taken an important step toward your trading survival goal. Essentially, the greater the proportion of your trading capital that is at risk on any one trade, the higher the risk of being destroyed or bankrupted.

Let me explain bankruptcy risk with an example. Suppose there are two businessmen, Bob and Sally. Bob and Sally attended the same seminar where they learned a simple currency trading system called System One. The average profit of system No. 1 is equal to its average loss, with an accuracy of 56%. Each of them uses US$10,000 as the financial boundary and defines 100% loss of risk capital as the bankruptcy point. Trader Bob is a risk-taking trader and decides every The risk capital on a trade is $2,000. Trader Sally is conservative and the risk capital on each trade is $1,000.

Therefore, trader Bob has five funds available for trading and Sally has ten. If Bob starts trading and five consecutive trades fail, he will go bankrupt. It would take ten consecutive losing trades for Sally to make him bankrupt.

Bob and Sally must ask themselves, what is their respective risk of bankruptcy? Maybe saying when will they lose $10,000? You can answer this question using the bankruptcy risk formula summarized below.

This formula assumes that a trader's average gain equals the average loss.

As you can see, although Bob and Sally use the same currency trading system, they have different probabilities of going bankrupt. Bob has a 30% chance of losing his venture capital, while Sally has only a 9% chance of being defeated. Clearly, Bob's risk is much greater than Sally's.

To survive in trading, is Sally’s 9% probability of bankruptcy risk low enough? The answer is no, as a trader, you should keep your trading risk close to 0%.

Any statistical probability of financial bankruptcy above 0% is too high and it is certain that it will eventually lead to your bankruptcy, it is just a matter of time. However, even if you are trading with a 0% risk of bankruptcy, you must understand that this still does not guarantee that you will avoid the risk of bankruptcy. Because a trader with a bankruptcy risk of 0% cannot guarantee the accuracy of your trading method, there is no guarantee that the average gain and average loss will not change in the future. If they stay the same or even offer it, 0% bankruptcy risk will ensure you don't break the bank.

Let’s continue to take Bob and Sally as an example: When the average gain and average loss remain unchanged, what will happen if the accuracy increases from 56% to 63%?

Bob's bankruptcy risk has dropped from 30% to 7%, and Sally's bankruptcy risk has dropped from 9% to 0.48%.

Mathematically speaking, it is impossible for the bankruptcy risk to reach 0%. However, it is certainly possible to reduce the bankruptcy risk to less than 1%.

A bankruptcy risk model is established through the logic of the book "Futures Traders' Fund Management Strategies". The results of model calculations after multiple simulations are shown in the table below:

That is, the average return - The higher the average loss ratio, the lower the risk of bankruptcy.

In summary, there are three tools that can reduce the risk of bankruptcy:

However, you need to realize the following:

Despite these limitations, the risk of bankruptcy Concept is very important, it is the key to survival.

The concept of bankruptcy risk requires that trading should not occur unless the bankruptcy risk approaches 0%.