--- title: "Sharpe, max drawdown, Kelly, position sizing and risk of" description: "The Sharpe ratio measures return per unit of volatility, max drawdown measures the worst fall from a peak." source_url: "https://www.rupeecase.com/learn/questions/sharpe-drawdown-kelly-sizing" --- Model, not market data With no edge at all, a larger fraction risked per trade makes ruin more likely Model, not market data. A fair coin with an even payoff over a fixed run of trades per path, with ruin set at half of the starting capital. Each bar is one fraction of capital risked per trade. Inputs: win rate 50%, average win 1.00 times the average loss, 2% of the account risked on each trade, ruin at a 50% loss of the starting account, 250 trades, 2,000 simulated paths, seed 1. Source: RupeeCase risk of ruin model, no market figures. As of 16 Oct 2026. The Sharpe ratio is the average return above a risk free rate, divided by the standard deviation of returns. It rewards returns that are smooth relative to their swings and says nothing about one bad month. Two strategies with the same Sharpe can have very different worst falls, so a Sharpe figure alone is not enough. Max drawdown is the largest fall from a previous peak to a later low in the equity curve. It is the number a trader lives through. A fall of half the account needs the remaining half to double to recover, so deep falls cost more than their size on paper. Kelly sizing gives the fraction of capital to risk on a bet with win probability p and payoff ratio b: p minus (1 minus p) divided by b. It maximises long run growth on the assumed inputs. The inputs are estimates from a past sample, and full Kelly accepts large swings, so many users take a smaller fraction. Risk of ruin is the chance that the account falls to a set floor before the strategy has got through its run. The chart is a model, not market data. It runs a fair coin with an even payoff, so there is no edge at all, and the chance of ruin comes from the size alone. The [capital question](/learn/questions/capital-needed-for-options) shows how a single lot changes the size that a given account can carry. **Before you trade.** Derivatives trading carries a high risk of loss. SEBI's study "Profitability of Individual Traders in the Equity Derivatives Segment (FY25 to FY26)" (August 2026) found that 87.7% of individual traders in equity F&O made net losses in FY26, with aggregate net losses of Rs 91,685 crore. [Read the SEBI study](https://www.sebi.gov.in/reports-and-statistics/research/aug-2026/study-profitability-of-individual-traders-in-the-equity-derivatives-segment-fy25-fy26-_103835.html) Sharpe, max drawdown, Kelly, position sizing and risk of ruin: how do they fit?The Sharpe ratio measures return per unit of volatility, max drawdown measures the worst fall from a peak, and the Kelly fraction sizes a bet from win rate and payoff ratio, so each answers a different question about the same strategy. Position size decides whether a strategy survives its own bad run, which is why sizing matters as much as the signal. LGo deeper ## Where Learn teaches this. [Go deeperStrategy metrics: CAGR, Sharpe, Sortino, drawdown and expectancy9 min, Intermediate](/learn/path-19/module-19-2-strategy-metrics)[Go deeperPosition sizing and risk of ruin for F&O beginners8 min, Beginner](/learn/path-12/module-12-7-position-sizing-and-risk-of-ruin)[Go deeperKelly and sizing for option strategies10 min, Advanced](/learn/path-17/module-17-22-kelly-sizing)[Try itRisk of ruinWin rate, payoff and size, simulated to the chance of losing the account.](/learn/tools/risk-of-ruin) SSources ## Go to the source. 1. [SEBI investor education, Understanding derivatives](https://investor.sebi.gov.in/understanding_derivatives.html) SEBI 2. [SEBI study, F&O trading outcomes for FY22 to FY24 (Sep 2024)](https://www.sebi.gov.in/sebi_data/attachdocs/sep-2024/1727086965496.pdf) SEBI ?Questions people ask ## Related questions. [QuestionHow much capital do I need to trade or sell options?Beginner, trap check](/learn/questions/capital-needed-for-options)[QuestionHow do I backtest an option strategy in India, or in Python?Intermediate](/learn/questions/backtest-option-strategy)[QuestionCan option selling give a "daily income"?Intermediate, trap check](/learn/questions/option-selling-daily-income)[QuestionCan an option buyer lose more than the premium, and can I hold options to expiry?Beginner](/learn/questions/can-option-buyer-lose-more) [All 130 questions](/learn/questions/) Explore next ## Go deeper on this question. * [QuestionHow do I use Monte Carlo to test strategy risk?A short answer with a dated chart](/learn/questions/monte-carlo-strategy-risk) * [QuestionWhat is walk forward testing?A short answer with a dated chart](/learn/questions/what-is-walk-forward-testing) * [ToolOption payoff builderLegs on a dated Nifty chain, breakevens and charges](/learn/tools/payoff-builder) * [GlossaryInvesting glossary, 230 termsPlain word definitions, and the app’s own](/learn/glossary) Community ## Join my WhatsApp group. Scan the code, fillFill one short form, and join my WhatsApp group. Slides, sources, factsheets and the rebalance logs live there, and members join a daily Google Meet with me. New to RupeeCase? [Getting started](/getting-started) [See the terminal](/terminal) [Sign up for RupeeCase](https://invest.rupeecase.com/signup) [Join the WhatsApp group](https://forms.gle/C6HMtM1Z2GfeocQV7) [One form, one group](https://forms.gle/C6HMtM1Z2GfeocQV7)Scan with your phone camera Education only, not investment advice, a research report or a recommendation to buy, sell or hold any security. RupeeCase (QC Alpha Technologies Pvt Ltd) is not registered with SEBI as an investment adviser or research analyst. Contracts and prices shown are for illustration only, come from NSE end of day files at least 30 days old, and are not recommendatory. Derivatives trading carries a high risk of loss.