News Trading According to the 3-5-7 Rule: The Risk Management System for Traders

The concept of news trading requires a robust risk management system to succeed in the highly volatile environment of market movements. The 3-5-7 rule offers exactly this structured approach: never risk more than 3% of your trading capital per trade, keep your total exposure across all open positions limited to 5% of your capital, and ensure that profitable trades are at least 7% more profitable than losing ones. This combination of precise capital allocation and disciplined profit target setting creates the foundation for sustainable profitability in news trading.

The Background: Why News Traders Need the 3-5-7 Rule

Experienced traders developed the 3-5-7 rule to address the fundamental challenge in trading: minimizing risks while maximizing gains. Especially in news trading, where market reactions to news are often abrupt and unpredictable, a strict risk management system becomes essential.

The rule operates on a simple but effective principle: it breaks down total risk into three manageable components that work together to protect your portfolio from catastrophic losses while securing opportunities for consistent gains.

The First Component: 3% per Trade – Your Capital Protection

The first building block protects your assets from excessive losses from individual trades. The 3% rule states: never risk more than 3% of your total trading account on a single trade.

How it works: If you have a trading account of €50,000, you may risk a maximum of €1,500 per trade. This forces you to trade only the most promising setups and analyze each position carefully.

The advantage in news trading: reactions to news can be surprising. With the 3% rule, you ensure that even if you are completely wrong, a single trade won’t wipe out your entire portfolio. This allows you to trade multiple news events in succession without falling into emotional panic.

The Second Component: 5% Total Exposure – Diversification and Control

The second part of the rule prevents over-concentration in individual markets or news categories. Your total exposure across all open positions must not exceed 5% of your total trading capital.

Practical example: With a portfolio worth €100,000, this means you should not have more than €5,000 invested simultaneously across all open trades. This could mean: €2,000 in a crypto news trade, €1,500 in a stock reaction, €1,000 in a commodity news, and €500 in reserve.

This limit protects you from the classic mistake of putting everything on the line in multiple consecutive news trades. You stay liquid and flexible to respond to new news.

The Third Component: 7% Profit Target – The Profitability Equation

The third pillar focuses on quality over quantity: profitable trades should be at least 7% more profitable than losing trades. This means if you lose an average of 2% per losing trade, your winning trades should average 9% or more.

This asymmetry is crucial for long-term profitability. It guarantees that your gains outweigh your losses, even if you win fewer trades than you lose.

Example for news trading: If three news trades in a row are losses (-2% each), you are down 6%. A single successful news trade with a +9% gain more than offsets these losses and puts you in profit. This trains you to wait for high-probability news events with greater profit potential rather than entering on weak setups.

The Psychological Component: Discipline in News Trading

The 3-5-7 rule only works if you follow it consistently. News trading can be emotionally taxing—the speed of market movements tempts traders to take larger positions or to “flex” the rule.

The key lies in self-control and perseverance. Set clear stop-loss levels based on your 3% rule before entering the trade. This automates your discipline and removes the emotional component.

Practical Checklist for Your Application

1. Before each trade: Calculate your maximum loss (3% of your capital) and set your stop-loss accordingly.
2. Check total exposure: Add up all open positions—stay below 5%.
3. Define your profit target: Aim for at least 7% profit on winning trades.
4. Stick to it: No exceptions, no emotions, no “what-if” scenarios.

The 3-5-7 rule is not flexible—and that is its strength. It creates a robust framework for consistent profitability in news trading over the long term.