You size every trade at 1% risk. You have six positions open. How much are you risking?
The answer most people give is 1%. The honest answer is up to 6% — and if those positions move together, it behaves like a single 6% trade. Portfolio heat is the number that makes this visible.
What portfolio heat means
Portfolio heat is your total open risk: the sum of what you would lose if every open position hit its stop at once.
Three positions at 1% risk each gives you 3% heat. Simple to calculate, and routinely ignored, because per-trade sizing feels like it has already solved the problem.
It has not. Position sizing governs individual trades. Heat governs the account.
Why simultaneous stops are not a freak event
The instinctive objection is that all your stops will not hit on the same day. Usually true. Occasionally very false — and the occasions cluster.
Markets become more correlated under stress. Positions that behaved independently for months start moving together precisely when things go wrong. Four long positions in the same sector are not four trades; they are one trade expressed four ways.
This is the risk that per-trade sizing cannot see. Each trade is correctly sized. The portfolio is not.
Setting a heat cap
Decide the maximum total open risk you will carry, and let that govern how many positions you may hold.
| Risk per trade | Heat cap | Max concurrent positions |
|---|---|---|
| 0.5% | 4% | 8 |
| 1% | 5% | 5 |
| 2% | 6% | 3 |
Once you are at your cap, a new setup is not available — regardless of how good it looks. That is the entire discipline: the cap binds when you least want it to.
Adjusting for correlation
Raw heat treats every position as independent. Correlated positions should count for more.
A practical approach is to weight them:
- Unrelated positions — count at face value
- Same sector or theme — count at roughly 1.5×
- Effectively the same trade (two currency pairs sharing a side, two miners on the same metal) — count as one combined position
This is an estimate, not a calculation, and it does not need to be precise. It needs to stop you holding five versions of one bet while believing you are diversified.
Heat and drawdown
Heat caps exist because of what drawdowns do to recovery. At 5% heat, a full simultaneous stop-out costs 5% — a bad week, recoverable with a 5.3% gain.
At 15% heat, the same event costs 15%, needing 17.6% to recover. And as drawdown recovery maths shows, that gap widens sharply the deeper the hole gets.
The cap is not about avoiding losses. It is about keeping losses in the range where arithmetic still works in your favour.
Adding to winners
Scaling into a position that is working feels like pressing an advantage. It also raises heat.
The clean way to handle it: once a position's stop has moved to break-even, its contribution to heat drops toward zero, because a stop-out no longer costs you capital. That frees room for new positions without raising total risk.
Adding to a position whose stop is still below entry raises heat and should count against the cap in full.
Putting it into practice
- Calculate heat before every new entry, not at the end of the day. The question is whether this trade fits, not whether the account survived.
- Write the cap into your trading plan as a number, alongside your per-trade risk.
- Track it in your journal — record heat at entry for each trade. Breaches become obvious in review.
- Treat correlated positions as one when the honest answer is that they are.
The point of the number
Heat converts a vague worry — am I overexposed? — into a figure you can check in ten seconds before clicking buy. That is its whole value.
Traders rarely blow up because one trade was too large. They blow up because six trades were individually reasonable and collectively enormous, and nobody was adding them up.
Frequently asked questions
What is a reasonable portfolio heat cap? Many active traders work between 4% and 6% total open risk. Lower is appropriate if your positions tend to be correlated or your edge is not yet well established across a large sample.
How do I count a position once the stop is at break-even? It contributes close to zero heat, because being stopped out no longer costs capital. That is why moving stops to break-even frees capacity for new positions.
Does portfolio heat apply to long-term investing? Not directly, since long-term investors usually do not trade with stops. The equivalent concept is concentration risk — how much of the portfolio depends on one company, sector, or theme performing.
Should I reduce heat in volatile conditions? Many traders do, on the basis that correlations rise and stops are hit more often when volatility spikes. Reducing position count or per-trade risk during those periods is a common and defensible adjustment.
This article is general educational information, not financial advice. Trading carries risk, including the loss of capital. Consider speaking with a licensed financial professional about your own circumstances.