Portfolio Heat

Portfolio heat is the total amount of money you would lose if every open position hit its stop loss at the same time. Sizing each trade correctly is the first step in risk management; portfolio heat is the second, because many small, correctly sized positions can add up to a large combined risk. Keeping heat within a limit stops you from becoming overexposed during periods when you find many setups at once.

How to calculate portfolio heat#

Portfolio heat = Σ (Risk to stop on each open position) ÷ Account value

Risk to stop is the distance from the current price (or entry) to the stop, times the position size.

Setting a heat limit#

The right number depends on how correlated your positions usually are and how much drawdown you can tolerate. A heat limit should be set so that a bad day where most positions stop out is painful but not damaging.

Heat changes as trades move#

• When trades move in your favour and you trail stops to breakeven or beyond, their risk falls to zero or becomes locked in profit, reducing heat. This frees room for new trades.
• When prices gap, actual losses can exceed calculated heat, because stops fill at worse prices.

Many trend followers only add new positions when existing ones have moved their stops to breakeven, keeping heat in check while pyramiding. See Scaling In and Pyramiding.

Adjusting for correlation#

Raw heat treats every position as independent. If positions are correlated, the effective risk is higher. Practical adjustments:

• Count highly correlated positions as one when deciding whether to add more.
• Set a separate heat cap per sector, theme or currency.
• Use a correlation adjusted measure for larger portfolios. See Correlation-Adjusted Sizing.

Heat and other limits#

Portfolio heat works alongside your other rules:

• Per trade risk caps each position. See Position Sizing.
• Daily loss limit caps realised losses in a day. See Maximum Trade Risk and Daily Loss Limits.
• Concentration limits cap exposure to any single asset or sector. See Concentration Risk.

Tracking heat in practice#

Keep a simple table in your journal or spreadsheet with each open position's size, current price, stop and risk to stop. Update it whenever you open, close or adjust a position. Some platforms calculate it automatically.

Common mistakes#

• Ignoring heat entirely and opening every valid setup.
• Treating correlated positions as independent.
• Forgetting that heat changes as stops are moved.
• Assuming stops limit losses exactly in gap prone markets.

Frequently asked questions#

What is portfolio heat in trading?#

The total percentage of your account at risk across all open positions if every stop were hit.

What is a good portfolio heat limit?#

Many traders keep total open risk between 2% and 8% of their account, depending on correlation and experience.

How do I reduce portfolio heat?#

Close or reduce positions, move stops to breakeven when trades work, or avoid adding new correlated positions.

Next, learn about the risk of putting too much in one place: Concentration Risk.