What is the 3 5 7 rule in trading "Master the Ultimate Strategy "
Every trader enters the market with the dream of making a profit. Earning a profit is not at all difficult. However, consistently staying in a profitable position and having a green portfolio is surely a tough task.
Your goal should not be profitable, but to stay consistently profitable. 90% of traders failed to understand this simple concept in the market. The popular 3-5-7 rule in trading is based on this concept only.
Wait, you don’t know what is the 3 5 7 rule in trading? Not to worry. In this Market Invesopedia blog, we will have an in-depth study on this trade rule and find out why it is getting all the hype. So let’s get started.
What is the 3 5 7 rule in trading?
A 3 5 7 rule in trading is a strategy to buy or sell financial assets. It states that a trader should not risk more than 3% of the trading capital per trade, the overall exposure to all open trades should not be more than 5% of the capital, and the winning trades should be at least 7% more than the losing trades.
A quick glance
The 90% rule in trading states that 90% of traders lose 90% of their capital in the first 90 days.
The 80/20 rule states that trading is 80% waiting and 20% executing.
The number one rule in trading is to first learn and then earn.
The golden rule in trading is never take a risk more than you can afford to lose.
Confused? Not to worry. Let us understand each component solely:
3% of Risk per Trade:
When you place a trade, the probability of both positive and negative outcomes exists. Beginners generally see the profit probability and ignore the possibility of loss.
However, the 3 5 7 rule in trading strategy gives priority to risk management over profit expectations. As per the rule, a trader should not risk more than 3% of their capital on a single trade. In this case, even if you lose money, the loss amount will not be more than your risk-taking capacity.
For example, a trader has a capital of $50,000. In this case, the risk amount per trade should not exceed 3% of the capital, which is $1500.
5% to Total Exposure:
With the risk amount, deciding how much capital is exposed to the market also plays a crucial role. The rule is to limit the number of trades that ultimately have an impact on overall profit.
Many traders keep multiple positions open, hoping for a big profit. However, the trade’s quality matters, not quantity. Thus, as per this rule, the trader should not expose 5% of capital to open trades.
For example, a trader with $50,000 capital should only place trades worth $2500. In this case, if the trader already has an open trade of $1000, then the trader can use only $1500 for further trades as per the rule.
7% Overall Profit
Now comes the profit, the ultimate aim of every trader. As per the rule, a trader’s profit from winning trades should be 7% more than the losses. This helps traders to remain consistently in a profitable position.
For example, a trader with a capital of $50,000 should aim for an overall profit of at least $3500.
3 5 7 rule in Trading forex example
We have studied each element of the 3 5 7 strategy. Now let us have a look at the 3 5 7 rule in trading example collectively:
Suppose a forex trader has a capital of $10,000. Now, the maximum risk per trade will be $300, the trading exposure limit will be $500, and the overall profit expectation will be at least $700 as per the rule. So, the trader will develop the entire strategy by considering the rules and numbers.
4 Amazing Benefits of the 3-5-7 Trading Strategy
Versatility
The 3 5 7 rule in trading has applicability to diverse markets. This means you can use the strategy to trade in forex pairs, commodities, stocks, ETFs, indices, or any other product. This helps traders in diversifying their capital into different assets and managing risk efficiently.
Maximum gains at Minimum Loss
The main aim of the strategy is to remain consistently profitable. The strategy does not promise high or unrealistic gains, and the risk is also not higher.
As the 3 5 7 traders aim for 7% of the overall profit, the profit potential collectively is higher. With the right approach, traders can earn maximum profit at minimum risk using the strategy.
Emotion Managemet
Generally, the profit and loss have a significant impact on emotions that leads to wrong decisions. Emotions such as greed and fear make trader play with their profit and loss criteria.
However, with this strategy, the profit and loss are fixed. As a result, traders can neither exceed the profit nor the risk amount. Also, big losses result in psychological stress, frustration, and anger. However, 3 5 7 traders already remain aware of their risks and rewards. So it helps them in keeping the right trading psychology.
High Volatility
High volatility is a trading period where an asset price sees a huge rise and fall. It occurs due to the release of big financial news, an announcement, or an unexpected event.
During such a period, trading became risky and uncertain, and traders may incur a huge loss. However, a 3 5 7 trader will not lose more than 5% of the trading capital even during such market conditions
Tips for Using the 3 5 7 Trading Rule Effectively
Practice Demo Trades
If you are a beginner and have not used the strategy yet, first practice. Open a demo account with a reputable trading broker platform and place a few demo trades based on the strategy.
You can check the strategy in the live market conditions with zero risk. It will help you in identifying whether the strategy works for you or not.
Consider Broader Market Conditions
In the trading world, sticking to rules, and sometimes adjusting the rules, both are important. Which approach you need to go for depends entirely on market conditions.
Sometimes, even the market conditions require you to adjust your risk-to-reward ratio. In such cases, watch the broader market aspects and make changes in the strategy accordingly.
Use the Power of Automation
Calculating the 3 5 7 ratios and executing trades is quite a complex process. Delayed or mistakes in execution can affect the overall results. Thus, consider using automated trading software to execute trades automatically at the desired criteria.
Review and Customization
3 5 7 trading is a great strategy, but may not be ideal for all traders. It is also possible that the style stops working for you after a period.
Thus, record your trade and organize a timely review. These will help you determine the strengths and weaknesses of your plan. You can even make changes in the strategy based on the outcomes.
Bottom Line
Trading is not about earning profit; it’s about greater and consistent profits than losses. And the 3 5 7 rule in trading aims for consistency. You can manage your risk, place entry and exit points, maximize the profit potential, and increase the overall trade effectiveness.
Undoubtedly, the strategy is worth the hype, especially for beginners. However, before starting to trade using the strategy, clear your basics and practice it on demo accounts.
Also, if you are struggling to identify an ideal strategy, contact Market Investopedia. Our expert team will assess your needs and suggest an ideal strategy to get started on your trading journey.
