What is the 357 rule?

The 3-5-7 rule is the foundation of professional trading. It's the single most important framework for surviving your first year and beyond.

Why These Three Numbers?

The rule developed from decades of trading failure data. Researchers analyzing thousands of trading accounts found:

- Traders who risk more than 3% per trade blow accounts faster - Traders who don't limit total exposure across positions get whipsawed during correlations - Traders without minimum reward-to-risk requirements take low-probability trades

These three rules together prevent all three failure modes.

The 3% Rule: Single Trade Risk

Never risk more than 3% of your total account on one trade.

This is non-negotiable. It's the difference between a manageable loss and an account-ending catastrophe.

Why 3% specifically?

Research shows traders can psychologically handle 3% losses without emotional breakdown. Beyond 3%, traders make irrational revenge trades trying to recover quickly. They abandon their system and override their stops.

A trader who risks 5% on a trade, then hits a 5-trade losing streak, is down 25%. The account isn't even close to ruin yet, but the trader feels it. They get desperate. They overtrade and blow the account.

A trader who risks 3% on trades, then hits a 5-trade losing streak, is down 15%. That's easy to stomach. They can continue executing the system with discipline.

Calculating Position Size

Formula: Position size = (Account size × 3%) / (Entry price - Stop price)

Example: - Account: $10,000 - 3% = $300 maximum risk per trade - Stock entry: $100 - Stop-loss: $97 (3% stop) - Distance to stop: $3 - Position size = $300 / $3 = 100 shares

If the trade hits the stop at $97, you lose: 100 shares × $3 = $300 exactly.

If the trade rises to target of $107, you make: 100 shares × $7 = $700 profit.

The 5% Rule: Total Portfolio Exposure

Keep all open positions combined under 5% total portfolio exposure.

Example: - Trade 1: Risk $300 - Trade 2: Risk $200 - Trade 3: Risk $150 - Total: $650

Your 5% threshold on $10,000 = $500 maximum.

You're over by $150. Close Trade 3 or reduce all positions by 23%.

Why this matters:

If you have three separate 3% trades and all three go against you simultaneously, you lose 9%. The 5% total portfolio rule caps that damage at 5%.

This seems overly conservative until you experience a correlation event. During market crashes or unexpected news, assets that normally move independently all tank at once. The 5% rule saves your account in those scenarios.

The 7:1 Rule: Reward-to-Risk Ratio

Target at least 7:1 reward-to-risk on every trade. Risk $100, target $700 profit.

This ratio is the profit engine. It ensures that even with a moderate win rate, you make money.

Example: Low Win Rate Math

Assume 40% win rate (below average, but possible): - 10 trades: 4 winners, 6 losers - 4 winners at 7:1 = 4 × $700 = $2,800 profit - 6 losers at $100 = $600 loss - Net = $2,200 profit

At 40% accuracy, you're still profitable. T