(06/08/12) The Rule of 3, 5, and 7 in Trading (2024)
In this video, an interesting quirk of the markets is explained, with an eye on how traders can take advantage.
I should start by saying that this really isn’t a rule, as much as it is a “rule of thumb.” Meaning it doesn’t always work (does anything always work in trading?) but it works enough that it is something to which you should pay attention.
The strategy is very simple: count how many days, hours, or bars a run-up or a sell-off has transpired. Then on the third, fifth, or seventh bar, look for a bounce in the opposite direction.
Too easy? Perhaps, but it’s uncanny how often it happens. And sometimes the simplest trading ideas in trading make the most money.
A risk management principle known as the “3-5-7” rule in trading advises diversifying one's financial holdings to reduce risk. The 3% rule states that you should never risk more than 3% of your whole trading capital on a single deal.
You need a trading plan because it can assist you with making coherent trading decisions and define the boundaries of your optimal trade. A decent trading plan will assist you with avoiding making passionate decisions without giving it much thought.
However, if the stock falls 7% or more below the entry, it triggers the 7% sell rule. It is time to exit the position before it does further damage. That way, investors can still be in the game for future opportunities by preserving capital. The deeper a stock falls, the harder it is to get back to break-even.
Rule of three is an unwritten rule that recommends that a trader should use three timeframes before they initiate a trade. Proponents believe that looking at three timeframes will help a trader identify all the necessary points they need to execute a trade.
Portfolio management with 70% hedge and 30% spot delivery. Option to leave the trade mandate to the portfolio manager. The portfolio trades include purchasing and selling although with limited trading activity.
While short-term capital gains from stocks or ETFs are taxed at your ordinary income tax rate, futures are taxed using the 60/40 rule: 60% are taxed at the long-term capital gains tax rate of 15%, while only 40% of your short-term capital gains are taxed at your ordinary income tax rate.
Part one of the rule said that in the next 12 months, the return you got on a stock was 70% determined by what the U.S. stock market did, 20% was determined by how the industry group did and 10% was based on how undervalued and successful the individual company was.
This rule suggests that a stock's price tends to move in cycles, with the first 3 days after a major event often showing the most significant price change. Then, there's usually a period of around 30 days where the stock's price stabilizes or corrects before potentially starting a new cycle [1].
The Rule. If, after trading outside the Value Area, we then trade back into the Value Area (VA) and the market closes inside the VA in one of the 30 minute brackets then there is an 80% chance that the market will trade back to the other side of the VA.
For example, if your investment earns 6% per year on average, you would take 72 divided by 6 to determine that it will take 12 years for your money to double. Based on the above, you would need to earn 10% per year to double your money in a little over seven years.
The time of day when a trade is made can be an important factor to consider. The closest thing to a hard-and-fast rule is that the first hour and last hour of a trading day are the busiest, offering the most opportunities, while the middle of the day tends to be the calmest and most stable period of most trading days.
1 At 10%, you could double your initial investment every seven years (72 divided by 10). In a less-risky investment such as bonds, which have averaged a return of about 5% to 6% over the same period, you could expect to double your money in about 12 years (72 divided by 6).
5% Rule: This rule applies to the total risk exposure across all your open trades. It recommends limiting the total risk exposure of all your trades combined to no more than 5% of your trading capital. This means if you have multiple trades open simultaneously, their combined risk should not exceed 5%.
Let profits run and cut losses short Stop losses should never be moved away from the market. Be disciplined with yourself, when your stop loss level is touched, get out. If a trade is proving profitable, don't be afraid to track the market.
Risk-Reward Ratio (1:3): For every trade you take, you are willing to risk 1 unit of your capital (e.g., $100) to potentially gain 3 units (e.g., $300) if the trade goes in your favor. Now, let's consider the win rate: 2. Win Rate: This represents the percentage of your trades that are profitable.
The 5-3-1 strategy is especially helpful for new traders who may be overwhelmed by the dozens of currency pairs available and the 24-7 nature of the market. The numbers five, three, and one stand for: Five currency pairs to learn and trade. Three strategies to become an expert on and use with your trades.
One of them is 1-2-3. Graphically it looks like a combination of three extremes, the second of which is a correctional one. In this case, in the conditions of the bullish market, point 3 is always below point 1.If the situation is controlled by bears, point 3, on the contrary, will be located above point 1.
Introduction: My name is Mr. See Jast, I am a open, jolly, gorgeous, courageous, inexpensive, friendly, homely person who loves writing and wants to share my knowledge and understanding with you.
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