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TRADING #101 COURSE – PART II TWO: SUCCESSFUL TRADING PIE – WWW.TRADERSCOACH.COM

Comparing Optimal ƒ Formula Results to the

Risk of Ruin Tables

The optimal f formula results give you a higher risk percentage than the risk of ruin
tables do when striving for a zero percent likely chance of ruin.

Example #2 of the Optimal f formula:

• ƒ is the unknown quantity (or the optimal percentage to be risked).
• A is an average payoff ratio of 2 to 1.
• p is an average win ratio of 40 percent.
•

Example #2 of the Optimal f formula:

ƒ = [ (2 + 1) X 0.40 ] – 1 = 1.20 – 1 = 0.20 = 0.10 = 10%

2 2 2

To get a percentage, multiply f result by 100.

In Example #2, the optimal f formula calculates that for a trader with a payoff ratio of 2
to 1 and a win ratio of 40 percent winning trades, the optimal amount of capital to risk is
10 percent, and the implication is that there will be 0.0 percent risk of ruin.

When we refer to Table 13.4 risk of ruin probabilities with 10% of capital at risk, the
calculation for this scenario gives us a probability of 14.3 percent risk of ruin – as
opposed to the Optimal f formula - which implies a 0.0 percent risk of ruin.

The only reason for bringing this point up is to make you aware of the difference
between the two approaches for determining your percentage of risk.

Using the optimal f formula, you should understand that it does not calculate a risk
percentage that gives you a zero percent probability of ruin (remember this is a
probability, not a guarantee).

Optimal f is a more aggressive approach that takes on more risk than when using the
risk of ruin tables. It is still an extremely valid approach to determining an accurate
amount to risk on each trade based on your current performance statistics.
This is far better than an arbitrary risk amount based on a mere guess of what is
optimal.

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