What are Trading Strategies? 90% Rule, 3-5-7 Rule, & Best Trading Strategies for You

Many traders jump into the market with no clear plan. Some chase fast-moving stocks. Others rely on gut feelings.

Without a strategy, losses pile up fast. Following a defined trading system enables traders to control their feelings while implementing proper risk management to raise their chance of enduring market success.

The path to trading success avoids depending on luck. The strategies they follow contain precise rules to define their trade entries and exits, together with risk protection protocols.

This guide breaks down the most effective trading strategies, risk management techniques, and industry realities every trader needs to know.

What is Trading Strategy for Success in the Markets?

The rules that guide asset purchases and sales constitute trading strategies. Strategies used for decision-making mitigate uncertainty and enable traders to make objective choices.

Key Components of Trading Strategy

The essential components that make up a trading strategy consist of the following elements:

Market Selection

Every trader should select their market choice between stocks, forex commodities, or crypto.

Timeframe

Short-term (day trading) or long-term (position trading).

Entry and Exit Rules

The rules governing trade entries and exits consist of two key elements, which include entry signals from indicators together with exit triggers derived from price movement.

Risk Management

Stop-loss placement and position sizing to protect capital.

Performance Evaluation

Reviewing past trades to refine the strategy.

Also Read: What is Institutional Trading?

Example: Trend Trading Strategy

A trend trader follows moving averages to identify upward or downward trends.

Entry Rule:

• Traders should purchase assets after the 50-day moving average surpasses the 200-day moving average (golden cross).

Exit Rule:

• Traders should execute a sale when the 50-day moving average crosses below the 200-day moving average (death cross).

Most traders fail within the first 90 days. This is known as the 90-90-90 rule:

• 90% of traders lose 90% of their capital in 90 days.

Why Do Traders Fail?

• Taking large positions without managing risk.
• Exiting too early from fear or holding onto losses from greed.
• Trading without understanding strategies or market conditions.
• Entering trades without stop-loss protection.

How to Avoid the 90% Trap?

• Never risk more than 2-3% of total capital on a single position.
• Use trend trading, swing trading, or scalping instead of random trades.
• Use stop-loss orders to prevent emotional decision-making.
• Track and review trades to analyse mistakes and improve execution.

What is The 3-5-7 Rule in Trading?

Risk management separates profitable traders from those who blow up their accounts. The 3-5-7 rule helps control risk.

What is the 3-5-7 Rule?

This trading structure both shields traders from substantial losses and maintains profitable trades which exceed the number of losing trades.

3% Rule

Never risk more than 3% of your total capital amount on a single trading position.

5% Rule

The total risk for all positions should not exceed 5% of the trading capital.

7% Rule

Each profitable trade should bring at least 7% more profit than each losing trade.

Example: Applying the 3-5-7 Rule

Types of Trading Strategies and How to Implement Them in Different Market Conditions

1. Trend Trading: Riding the Market Momentum Using Moving Averages

Trend traders follow price momentum using moving averages.

Entry Rule:

• Buy when the 50-day moving average crosses above the 200-day moving average (Golden Cross).

Exit Rule:

• Sell when the 50-day moving average crosses below the 200-day moving average (Death Cross).

2. Swing Trading: Profiting from Short-Term Price Swings with RSI and Fibonacci

Swing traders hold trades for days to weeks, taking advantage of market swings.

Indicators Used:

• Relative Strength Index (RSI) and Fibonacci retracement levels.

Entry Rule:

• Buy when RSI is below 30 (oversold zone), and the price hits a key Fibonacci level.

Exit Rule:

• Sell when RSI reaches 70 (overbought zone).

3. Day Trading: Making Fast Trades Using Market Volume and Price Action

Day traders enter and exit trades within the same day.

Indicators Used:

• Volume-weighted average price (VWAP) and candlestick patterns.

Entry Rule:

• Buy when the price crosses above VWAP with strong volume.

Exit Rule:

• Sell when a reversal pattern forms on high volume.

4. Scalping: High-Frequency Trading for Small, Frequent Profits

Scalpers make multiple small trades per day to profit from tiny price movements.

Entry Rule:

• Buy when the bid-ask spread narrows.

Exit Rule:

• Sell after a 0.2% to 0.5% price increase.

5. Algorithmic and Quantitative Trading: How Automated Systems Execute Trades

Algo traders use computer programs to execute trades based on pre-set rules.

Strategy Used:

• Moving average crossovers, statistical arbitrage, and mean reversion.

Tools:

• Python, TradingView, MetaTrader algorithms.

6. Breakout and Reversal Strategies: Capturing Market Turning Points with Chart Patterns

Breakout traders enter trades when the price breaks key support or resistance levels.

Entry Rule:

• Buy when the price breaks above a resistance level with high volume.

Exit Rule:

• Sell when the price loses momentum.

Also Read: Understanding the PE Ratio

How Do I Create My Own Trading Strategy?

A trading plan keeps decision-making structured and removes emotional trading.

Steps to Create a Trading Plan

A trading plan keeps trades structured and prevents emotional decisions.

1. Define Goals – Choose profit targets, risk limits, and growth milestones.
2. Select Markets – Stocks, forex, commodities, or crypto.
3. Choose a Trading Style – Short-term or long-term.
4. Set Risk Management Rules – Use stop-losses and position sizing.
5. Track Performance – Keep a journal to review wins and losses.

Setting a Well-Defined SMART Trading Goals

Many traders set goals without a clear strategy. Some aim to double their money in a month. Others focus on winning every trade. These goals set traders up for failure.

• Specific
• Measurable
• Achievable
• Relevant
• Time-bound

Example of SMART Trading Goals

Determine the Right Trade Size Based on Risk

Many traders risk too much on a single trade. A few bad trades wipe out their accounts.

Position sizing ensures each trade risks only a small percentage of total capital.

How to Calculate Position Size

• Never risk more than 2-3% of total capital.
• Identify a logical stop-loss level.
• Calculate Position Size
• Position Size = (Risk Per Trade) ÷ (Stop-Loss Distance)

Common Position Sizing Mistakes

• Using high leverage increases losses.
• Ignoring stop-loss leads to unlimited risk.
• Betting too big.

The Impact of Trade Correlation and Diversification on Your Portfolio Risk

Many traders open multiple positions without realising their trades are correlated.

If all positions move in the same direction, risk increases instead of reducing.

Understanding Trade Correlation

• Highly Correlated Assets: Move in the same direction (e.g., HDFC Bank and ICICI Bank).
• Negatively Correlated Assets: Move in opposite directions (e.g., Gold and Nifty 50).
• Uncorrelated Assets: Move independently (e.g., Pharma stocks and IT stocks).

How to Diversify Trades

• Trade across different sectors.
• Balance long and short positions.
• Avoid overexposure in the same industry.

Backtesting and Forward Testing: How to Validate a Trading Strategy Before Using Real Capital

Most traders enter live markets before verifying their trading strategies. Such decisions cause traders to suffer financial losses and experience discouragement.

It is possible to evaluate strategy performance through backtesting and forward testing before investing actual funds.

Backtesting: Testing a Strategy on Historical Data

A trading strategy must be tested against historical price data to establish its performance level through Backtesting procedures.

How to Backtest a Strategy

• Choose a strategy like trend trading, swing trading, or scalping.
• Use past price movements from NSE, BSE, or forex markets.
• Set clear buy and sell signals.
• Apply the strategy to past data using platforms like TradingView or MetaTrader.
• Check the win rate, average return, and drawdowns.

Forward Testing: Testing a Strategy in Real Market Conditions

Forward testing, also known as paper trading, applies the strategy to live markets without real money.

Steps to Forward Test a Strategy

• Use a demo account on platforms like Zerodha, Upstox, and Angel Broking that offer demo trading.
• Execute trades exactly as planned, tracking entries and exits.
• Compare results with backtested data.
• Refine stop-loss levels, position sizes, or entry signals.

Market Manipulation and Institutional Trading Tactics: How to Think Like Smart Money

Retail traders often lose money because institutions control the market.

Large players use techniques to trigger stop-losses, create false breakouts, and manipulate liquidity.

Common Market Manipulation Tactics

Stop-Loss Hunting:

Institutions push prices below key levels to trigger retail traders’ stop-losses, then reverse the price.

Fake Breakouts:

The price breaks a resistance level, attracting buyers, then drops sharply to trap them.

Spoofing:

Placing fake large orders to create false demand, then cancelling them before execution.

Pump and Dump:

Stocks are artificially inflated, attracting retail traders, then sold off at a peak.

How to Avoid Market Manipulation?

• Avoid placing stop-losses at obvious levels like round numbers or previous lows.
• Wait for confirmation on breakouts before entering a trade.
• Monitor real buying and selling volumes using Level 2 order data.
• Think like an institution – enter trades where big players buy and sell.

Psychological Challenges in Trading: How to Maintain Emotional Discipline and Avoid Common Pitfalls

Many traders fail because of fear, greed, and impulsive decisions.

Trading psychology is just as important as strategy and risk management.

Common Psychological Pitfalls

• Fear of Losing leads to exiting winning trades too early.
• Overconfidence
• Trying to recover losses by taking random trades.
• FOMO (Fear of Missing Out): Chasing trades after the move has already happened.

How to Stay Disciplined

• Follow a Trading Plan.
• Track every trade and review mistakes.
• Stick to Risk Management
• Take Breaks.

Common Myths and Misconceptions About Trading Strategies That Every Trader Should Ignore

Many beginner traders make mistakes when they follow wrong assumptions; therefore, they experience financial losses. A trader must know misinformation equally as much as they must know useful information.

Myth 1: A Higher Win Rate Means More Profit

A substantial number of traders consider achieving more winning trades to be a path for maximising their profits. This is false.

A trader who wins four out of ten trades while receiving profit at ₹3,000 per victory but incurs losses at ₹1,000 for each trade ends up with a ₹2,000 total profit.

Myth 2: More Trades Will Lead Directly to Greater Profitability

High-frequency trading activities result in increased spending on transactions together with emotional exhaustion while making decisions deteriorates.

Myth 3: Trading is a Quick Way to Get Rich

A large number of investors choose to trade because they anticipate instantly making money with minimal work.

For successful trading you must have discipline along with a good strategy and proper risk management.

Myth 4: A Good Strategy Works in Every Market Condition

The particular financial approach cannot succeed under every market condition. Retail traders require adaptability to market changes that include handling fluctuations alongside market trends and economic environments.

Conclusion

A structured approach distinguishes a profitable trader from the one who is losing money. Trading strategies provide simple entry and exit rules, helping traders make rational decisions. Risk management ensures that losses stay in control and account wipeouts do not happen.

Success in trading is gained through strategy, discipline, and constant learning. Every trader who creates a profit works with a plan, manages risk, and is flexible depending on what the markets portray.

The Certificate Program in Equity Research and Trading from Hero Vired offers industry-oriented training in trading strategies, risk management, and market analysis for those eager to learn. Lessons from experienced professionals can fill the gap between knowing and doing as traders fine-tune their strategies in the markets to shine better.