INVESTING: The 3-5-7 Percent Rule of Thumb

Posted on January 11, 2026 by Dr. David Edward Marcinko MBA MEd CMP™

By Dr. David Edward Marcinko MBA MEd

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The 3-5-7 investing rule is a practical framework designed to help traders and investors manage risk, maintain discipline, and improve long-term profitability. Though not a formal financial regulation, it serves as a guideline for structuring trades and portfolios with clear boundaries. The rule is especially popular among retail traders and those seeking a simple yet effective way to navigate volatile markets.

At its core, the 3-5-7 rule breaks down into three components:

  • 3% Risk Per Trade: This principle advises that no single trade should risk more than 3% of your total capital. For example, if your trading account holds $10,000, the maximum loss you should accept on any one trade is $300. This limit helps protect your portfolio from catastrophic losses and ensures that even a series of losing trades won’t wipe out your account.
  • 5% Exposure Across All Positions: This part of the rule suggests that your total exposure across all open trades should not exceed 5% of your capital. It encourages diversification and prevents over-leveraging. By capping overall exposure, traders can avoid being overly reliant on a few positions and reduce the impact of market-wide downturns.
  • 7% Profit Target: The final component sets a goal for each successful trade to yield at least 7% profit. This ensures that your winning trades are significantly larger than your losing ones. Even with a win rate below 50%, maintaining a favorable risk-reward ratio can lead to consistent profitability over time.

Together, these numbers form a balanced strategy that emphasizes risk control and reward optimization. The 3-5-7 rule is particularly useful in volatile markets, where emotional decision-making can lead to impulsive trades. By adhering to predefined limits, traders can stay focused and avoid common pitfalls like revenge trading or chasing losses.

One of the key advantages of the 3-5-7 rule is its adaptability. Traders can adjust the percentages based on their risk tolerance, market conditions, and account size. For instance, during periods of high volatility, one might reduce the per-trade risk to 2% or lower. Conversely, in stable markets, slightly higher exposure might be acceptable. The rule is not rigid but serves as a flexible foundation for building a disciplined trading strategy.

Moreover, the 3-5-7 rule promotes consistency. By applying the same criteria to every trade, investors can evaluate performance more objectively and refine their approach over time. It also helps in setting realistic expectations and avoiding the trap of overconfidence after a few successful trades.

In conclusion, the 3-5-7 investing rule is a simple yet powerful tool for managing risk and enhancing trading discipline. It provides a structured approach to position sizing, portfolio exposure, and profit targeting. Whether you’re a novice trader or a seasoned investor, incorporating this rule into your strategy can lead to more confident, calculated, and ultimately successful trading decisions.

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EDUCATION: Books

SPEAKING: Dr. Marcinko will be speaking and lecturing, signing and opining, teaching and preaching, storming and performing at many locations throughout the USA this year! His tour of witty and serious pontifications may be scheduled on a planned or ad-hoc basis; for public or private meetings and gatherings; formally, informally, or over lunch or dinner. All medical societies, financial advisory firms or Broker-Dealers are encouraged to submit an RFP for speaking engagements: CONTACT: Ann Miller RN MHA at MarcinkoAdvisors@outlook.com 

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Rethinking Productivity in Wealth Management

Posted on October 31, 2025 by Dr. David Edward Marcinko MBA MEd CMP™

By Vitaliy Katsenelsen CFA

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One of the biggest hazards of being a professional money manager is that you are expected to behave in a certain way.

One of the biggest hazards of being a professional money manager is that you are expected to behave in a certain way: You have to come to the office every day, work long hours, slog through countless emails, be on top of your portfolio (that is, check performance of your securities minute by minute), watch business TV and consume news continuously, and dress well and conservatively, wearing a rope around the only part of your body that lets air get to your brain. Our colleagues judge us on how early we arrive at work and how late we stay. We do these things because society expects us to, not because they make us better investors or do any good for our clients.

Somehow we let the mindless, Henry Ford–assembly-line, 8:00 a.m. to 5:00 p.m., widgets-per-hour mentality dictate how we conduct our business thinking. Though car production benefits from rigid rules, uniforms, automation and strict working hours, in investing — the business of thinking — the assembly-line culture is counterproductive. Our clients and employers would be better off if we designed our workdays to let us perform our best.

Investing is not an idea-­per-hour profession; it more likely results in a few ideas per year. A traditional, structured working environment creates pressure to produce an output — an idea, even a forced idea. Warren Buffett once said at a Berkshire Hathaway annual meeting: “We don’t get paid for activity; we get paid for being right. As to how long we’ll wait, we’ll wait indefinitely.”

How you get ideas is up to you. I am not a professional writer, but as a professional money manager, I learn and think best through writing. I put on my headphones, turn on opera and stare at my computer screen for hours, pecking away at the keyboard — that is how I think. You may do better by walking in the park or sitting with your legs up on the desk, staring at the ceiling.

I do my best thinking in the morning. At 3:00 in the afternoon, my brain shuts off; that is when I read my emails. We are all different. My best friend is a brunch person; he needs to consume six cups of coffee in the morning just to get his brain going. To be most productive, he shouldn’t go to work before 11:00 a.m.

And then there’s the business news. Serious business news that lacked sensationalism, and thus ratings, has been replaced by a new genre: business entertainment (of course, investors did not get the memo). These shows do a terrific job of filling our need to have explanations for everything, even random events that require no explanation (like daily stock movements). Most information on the business entertainment channels — Bloomberg Television, CNBC, Fox Business — has as much value for investors as daily weather forecasts have for travelers who don’t intend to go anywhere for a year.

Yet many managers have CNBC, Fox or Bloomberg TV/Internet streaming on while they work.

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STRADDLES: Offsetting Personal Property Positions and Stock

Posted on March 13, 2025 by Dr. David Edward Marcinko MBA MEd CMP™

By Staff Reporters and IRS

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Straddles: A straddle is any set of offsetting positions on personal property. For example, a straddle may consist of a purchased option to buy and a purchased option to sell on the same number of shares of the security, with the same exercise price and period.

Personal property.

This is any actively traded property. It includes stock options and contracts to buy stock but generally does not include stock.

Straddle rules for stock.

Although stock is generally excluded from the definition of personal property when applying the straddle rules, it is included in the following two situations.

  1. The stock is of a type that is actively traded, and at least one of the offsetting positions is a position on that stock or substantially similar or related property.
  2. The stock is in a corporation formed or availed of to take positions in personal property that offset positions taken by any shareholder.

Note

For positions established before October 22, 2004, condition 1 above does not apply. Instead, personal property includes stock if condition 2 above applies or the stock was part of a straddle in which at least one of the offsetting positions was:

  • An option to buy or sell the stock or substantially identical stock or securities,
  • A securities futures contract on the stock or substantially identical stock or securities, or
  • A position on substantially similar or related property (other than stock).

Position

A position is an interest in personal property. A position can be a forward or futures contract or an option.

An interest in a loan denominated in a foreign currency is treated as a position in that currency. For the straddle rules, foreign currency for which there is an active inter bank market is considered to be actively traded personal property.

Offsetting position

This is a position that substantially reduces any risk of loss you may have from holding another position. However, if a position is part of a straddle that is not an identified straddle, do not treat it as offsetting to a position that is part of an identified straddle.

Presumed offsetting positions

Two or more positions will be presumed to be offsetting if:

  • The positions are established in the same personal property (or in a contract for this property), and the value of one or more positions varies inversely with the value of one or more of the other positions;
  • The positions are in the same personal property, even if this property is in a substantially changed form, and the positions’ values vary inversely as described in the first condition;
  • The positions are in debt instruments with a similar maturity, and the positions’ values vary inversely as described in the first condition;
  • The positions are sold or marketed as offsetting positions, whether or not the positions are called a straddle, spread, butterfly, or any similar name; or
  • The aggregate margin requirement for the positions is lower than the sum of the margin requirements for each position if held separately.

Related persons

To determine if two or more positions are offsetting, you will be treated as holding any position your spouse holds during the same period. If you take into account part or all of the gain or loss for a position held by a flow-through entity, such as a partnership or trust, you are also considered to hold that position.

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