Portfolio Heat
The total risk live across all positions at once — the gauge that stops you from over-committing.
Portfolio heatThe total risk live across all your open positions at once. is the total risk you have live across all your open positions at once — the sum of what you’d lose if every position hit its stopA pre-set exit that caps your loss if a trade goes wrong.. It’s the capstone money-management gauge that stops you from over-committing, even when each individual trade looks fine.
The crucial realisation: *sizingDeciding how much to bet on each trade or holding. each trade safely is not enough — you must also cap your total risk across all positions, because many small “safe” bets can add up to a dangerous whole, especially if they’re correlatedHow closely two assets move together.. You might risk a disciplined 1% on each of ten trades and feel perfectly safe — but that’s 10% of your capital at risk simultaneously*, and if those trades are correlatedHow closely two assets move together. (same sector, same theme, same market direction), a single adverse event can hit them all at once, turning ten “small” risks into one large, possibly ruinous loss (recall hidden correlation risk). Portfolio heatThe total risk live across all your open positions at once. is the gauge that makes this total exposure visible and bounded: you set a maximum (say, total open risk ≤ 5–6% of capital), and you simply don’t add new positions once you’re at the limit — no matter how good the next setup looks. This is what ties individual sizingDeciding how much to bet on each trade or holding. (fixed-fractional, volatilityThe size of price swings — not their direction.-based) into a coherent whole: per-trade rules control each bet; portfolio heatThe total risk live across all your open positions at once. controls the aggregate. It enforces survival at the portfolio level — preventing the “death by a thousand correlated cuts” where disciplined individual sizing still leads to ruinThe probability of losing so much you can’t continue. because nobody was watching the total. Always know your portfolio heat, cap it, and respect the cap.
- What it is — total risk live across all open positions (what you’d lose if everything hit its stopA pre-set exit that caps your loss if a trade goes wrong.).
- Why it matters — many small “safe” bets sum to a large total, and correlatedHow closely two assets move together. ones can all fail together (one event, many losses).
- The gauge — set a max total open risk (e.g. ≤5–6% of capital) and *stopA pre-set exit that caps your loss if a trade goes wrong. adding* positions once you hit it, however good the setup.
- It ties it together — per-trade sizingDeciding how much to bet on each trade or holding. controls each bet; portfolio heatThe total risk live across all your open positions at once. controls the aggregate, enforcing survival at portfolio level.
ExampleYou risk 1% each on eight trades — feels disciplined. But six are bullish bets on the same sector. A sector shock gaps them all to their stops simultaneously: your “1% each” becomes a ~6% loss in a day from correlatedHow closely two assets move together. risk. A portfolio-heat cap (“max 5% total open risk, and limit correlatedHow closely two assets move together. exposure”) would have stopped you adding the later correlated trades — capping the aggregate damage. The individual sizingDeciding how much to bet on each trade or holding. was fine; the total was the danger.
Key takeawayPortfolio heatThe total risk live across all your open positions at once. is your total risk across all open positions — and capping it matters because many small “safe” bets sum to a large whole, with correlatedHow closely two assets move together. ones failing together. Set a max total open risk (e.g. ≤5–6%), stopA pre-set exit that caps your loss if a trade goes wrong. adding positions at the limit, and watch correlatedHow closely two assets move together. exposure. Per-trade sizingDeciding how much to bet on each trade or holding. controls each bet; portfolio heatThe total risk live across all your open positions at once. controls the aggregate — enforcing survival.
FAQs
What’s a reasonable maximum portfolio heat?
Many disciplined traders cap *total* open risk around 5–6% of capital (sometimes less), with tighter limits on *correlated* exposure (e.g. no more than a few percent at risk in one sector/theme). The exact figure depends on your strategy and risk tolerance, but the principle is firm: bound the aggregate, account for correlation, and stop adding positions once you hit the cap — no matter how attractive the next trade looks.