What is Risk Management & the 3-5-7 Rule?
Preserving capital is the whole game. Position sizing, stop-losses, and a simple cap that keeps you in business.
Definition
Risk management is deciding how much you can lose before you enter — not how much you hope to make. Position sizing converts a fixed risk (say 2% of your account) into a trade size given your stop distance. A stop-loss is the price at which you admit the idea was wrong and exit. The 3-5-7 rule is a beginner guardrail: risk no more than 3% on any single trade, 5% in any one instrument, and 7% across your whole portfolio at once.
Why it matters for trading
- A 50% loss needs a 100% gain just to break even — capital preservation is not optional, it is the arithmetic of survival.
- Position sizing, not entries, separates accounts that compound from accounts that blow up. The same strategy at two sizes: one survives a normal losing streak, the other ends the account.
- A pre-set stop removes the in-the-moment decision where fear and hope sabotage you.