When we learn to read we learn to read by sight, or memorization and also phonetically.  Many words in the English language do not follow the rules of phonics and need to be memorized.  That is why they are called sight words.  

If you want to start teaching your 3 year old to read, you should introduce many sight words immediately.  Don't expect your child to begin reading back to you immediately.  Learning to read is a process, that takes time and patience.  First you must just fill your child up with words.  Show them many words.  Once you have been doing this for several months you can then begin to focus your reading lessons on phonetic patterns.  This will help your child to understand the rules of the language, making it easier to master the English language.

You can begin to add words to your program that follow a certain rule.  For example, you can show your child the following words: arms, car, farmer, park, start, chart, and so on.  This lesson would help your child to understand the sound of the letters ar.  You can do this with many different sounds, helping your child to learn to read through sight and phonics.  This is really the best way to learn to read.

For more ideas on how you can teach your baby to read check out A Guide To Teaching Babies To Read.