TradaZen
In 20 seconds
- Definition
- At most 3% risk per trade, at most 5% across all open positions, and a 7 that varies by source.
- Math
- €10,000 account: at most €300 lost per trade, at most €500 if every open stop is hit.
- Example
- Two open trades at 3% each make 6%: the rule says to cut one to 2%.
- Trap
- At 3% per trade, ten losses in a row leave 73.7% of the account, versus 90.4% at 1%.
The 3-5-7 rule gets passed around a lot on trading blogs. It gives you three easy numbers to keep risk in check. But it has two flaws: nobody knows who wrote it, and its third number means different things on different sites.
This guide describes a training method, not investment advice. Trading carries a high risk of capital loss.
What the rule says
- The 3: you never risk more than 3% of your account on a single trade. If the stop is hit, you lose 3% at most.
- The 5: the combined risk of all your open trades stays at or below 5% of the account. If every stop is hit at once, you lose 5% at most.
- The 7: this is where sources disagree. The most common reading says your average win should be at least 7% larger than your average loss. Others make the 7 a cap on total risk, with the 5 becoming a cap per market. Still others treat it as a maximum account loss: once you hit it, you stop trading.
No market authority has defined it, and it has no known author. It shows up on broker and platform blogs, and they don't all describe it the same way. Treat it as one example of a risk rule, not as a standard.
The 3: what 3% per trade means
3% is three times the 1% rule. The gap shows up in losing streaks, and those happen even with a sound method:
| Losses in a row | 1% risk | 3% risk |
|---|---|---|
| 5 | 95.1% of the account | 85.9% of the account |
| 10 | 90.4% | 73.7% |
| 20 | 81.8% | 54.4% |
The math: remaining account = (1 − risk) raised to the power of the number of losses. After ten losses at 3%, 0.97 multiplied by itself ten times gives 0.737.
A streak of ten losses is nothing unusual. With 40% winning trades over 200 trades, the longest losing streak reaches eight or more three times out of four, according to the simulation detailed in the guide on the 1% rule.
The 3 is a cap. Nothing forces you to reach it, and risking less slows the decline during bad streaks.
The 5: counting open risk
The 5 addresses a problem the 3 can't see: several trades open at the same time can lose together.
Example: a €10,000 account. A first trade risks €300, or 3%. A second one, opened alongside it, would also risk €300, bringing the total to 6%. The rule says to cut that second trade to €200, for €500 of open risk.
The trap is correlation. Buying Bitcoin and buying Ether is almost the same bet, because the two often rise and fall together. Count them as one trade when you add up your risk.
Once a trade has moved in your favor and its stop has been raised to the entry price, it risks almost nothing, barring a price gap past the stop. It drops out of the count.
The 7: three readings, one calculation
Take the most common reading: an average win at least 7% larger than the average loss. In R, the unit of risk of a trade, that means an average win of at least 1.07 R for an average loss of 1 R.
The breakeven point is calculated as in the guide on the risk/reward ratio: 1 ÷ (1 + 1.07), or 48.3%. With wins barely larger than losses, you need to be right almost half the time, before fees, just to avoid losing.
| Average win, in R | Minimum win rate to break even |
|---|---|
| 1.07 R (the rule's 7) | 48.3% |
| 1.5 R | 40% |
| 2 R | 33.3% |
Under this reading, the 7 is a weak condition. It says nothing about how often your wins come. A journal kept in R tells you more than a rule does: it shows your actual average win, average loss and win rate.
What the rule doesn't do
- It doesn't place your stop. 3% of the account is an amount, not a price. The stop goes where your idea is proven wrong, and the size is calculated afterward. The guide on the stop loss shows where to place it.
- It doesn't fix a losing method. If your method loses on average, the rule slows the decline. It doesn't reverse it.
- It ignores fees and price gaps. A stop can be filled beyond its level, and the loss can exceed 3%.
Applying it, step by step
- Choose your risk per trade, 3% at most under the rule. Nothing forces you to go up to the cap.
- Place your stop where your idea is proven wrong.
- Calculate your size: amount at risk ÷ stop distance.
- Add up the risk of your open trades, grouping those that move together. Above 5%, reduce or wait.
- Record each result in R in your journal, then compare your average win with your average loss.
Practice measuring your risk
In TradaZen, the "Position sizing" unit teaches you to calculate the size that puts exactly 1% of the account at stake, stop included. The "Streaks and expectancy" unit teaches you to absorb a losing streak and to calculate a method's expectancy.
In Training, you choose Long or Short on a real chart with what comes next hidden. The app sets the Stop and the Target, shows what you put at stake and what you get if the Target is hit, then the market reveals what happened, on a Simulated balance. To learn more, read the page on the trading simulator.
Frequently asked questions
What is the 3-5-7 rule in trading?
A rule-of-thumb approach to risk management: no more than 3% of the account at risk per trade, no more than 5% across all open trades, and an average win at least 7% larger than the average loss. The 7 varies by source: some make it a cap on total risk, others a maximum account loss.
Should you risk 3% per trade?
The rule treats it as a cap, not a goal. At 3% per trade, ten losses in a row leave 73.7% of the account; at 1%, 90.4%. The lower your risk per trade, the longer you hold up during a bad streak.
What does the 7 mean in the 3-5-7 rule?
It has no single meaning. In the most common reading, your average win must exceed your average loss by at least 7%. With average wins of 1.07 R against losses of 1 R, you need to be right on 48.3% of trades to break even, before fees.
3-5-7 rule or 1% rule?
Both set a risk per trade, 3% or 1%. The 1% rule is more cautious and simpler. The 3-5-7 rule adds a useful limit, the cap on risk across all open positions, which you can keep while using a lower risk per trade.
Mehdi Azizi created TradaZen and published it on the App Store through the Devoria studio. The app's scenarios are real past charts, never made-up data.
TradaZen is a training tool: you play on past market data with a simulated balance. It is not a broker and not investment advice. Real trading carries a risk of capital loss.
