What is Portfolio heat?
Umumiy ochiq risk
In short
The amount you would lose if every open stop were hit at once, as a % of the account. Closely related (correlated) stocks count, in practice, as one big trade.
Also known as: open risk, total risk, correlation
Portfolio heat is the amount you would lose if every stop in your open positions were hit at the same time, expressed as a % of the account. Controlling single-trade risk isn't enough: with 8 positions at 1% each, the account is really 8% at risk.
Formula
- Position risk = (Entry − Stop) × number of shares
- Portfolio heat = Sum of all position risks ÷ Account × 100%
A position whose stop has moved to breakeven adds 0.
Correlation — the hidden risk
Stocks in the same sector (say, three semiconductor companies) often move together. Bad sector news can hit all three stops in one day. So closely related positions count in practice as one big trade. Diversification is not just the number of stocks but how different they really are.
A practical cap
Many traders cap total open risk at around 4–8%, and a single sector at around 2–3%. The exact number depends on the strategy, but the cap must be set in advance. Once it's reached, no new trades are opened until a position closes or a stop moves to breakeven. This protects against deep drawdowns.
The vertical mark is a sample limit: if every open stop hit at once, at most 6% of the account. Five stocks in one sector fit under it, but they fall together — in practice that is one big trade.
Example
Account $20,000, risk per trade 1% = $200 (illustrative). Open positions:
- 3 semiconductor stocks — $200 risk each.
- 1 utility stock — $200 risk.
- 1 healthcare stock — $200 risk.
Portfolio heat: 5 × $200 = $1,000 ÷ $20,000 = 5%. But semiconductors alone carry 3 × $200 = $600, i.e. 3% — effectively one large sector bet.
If one semiconductor stop moves to breakeven, heat drops to $800, i.e. 4%, and sector risk to 2%. Size positions with the position size calculator.
Mistakes and tips
Every day, add up all open stops and see total risk as a single number — most traders never calculate it.
Treat stocks from one sector or theme (for example AI) as a single position.
Reduce heat during earnings season: an earnings gap can skip past your stop and push the loss beyond 1R.
Frequently asked questions
- How many positions can I have open at once?
- Total risk matters, not the count. With a 6% cap and 1% risk that's 6 positions; with 0.5% risk it could be 12.
- What is the difference between portfolio heat and drawdown?
- Heat is the potential loss if open stops were hit now. Drawdown is the actual decline from the account's peak that has already happened.
Learn it in the Academy
This term is covered with hands-on examples and a quiz in these lessons of the interactive course.
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