Portfolio heat is the sum of all open-position risk expressed as a percentage of total account equity — the aggregate exposure a trader carries at any single moment. While per-trade risk rules (typically 1-2% per position) govern individual entries, portfolio heat answers the more dangerous question: what happens if multiple positions go wrong at the same time?
Key Takeaways
- Portfolio heat equals the sum of dollar risk across all open trades divided by account equity — once it hits your cap, stop adding positions.
- Correlation silently inflates true heat: four tech longs each risking 1% can act like a single 4% position during a sector-wide shock.
- Heat is dynamic — it changes as stops are trailed, positions are scaled, and unrealized P&L shifts; recalculate it continuously, not just at entry.
How Portfolio Heat Works
The formula is straightforward:
Portfolio Heat (%) =
[ Σ (Entry Price − Stop Price) × Position Size ]
÷ Account Equity × 100
Every open trade contributes its dollar risk — the distance between entry and stop multiplied by position size. Sum those amounts, divide by total account equity, and the result is your current heat percentage.
For options, do not use the premium paid as the risk figure. Use the max loss at expiry for defined-risk spreads, or the delta-adjusted dollar risk for long options where you plan to cut the position before expiration.
Heat is dynamic by nature. When a stop is trailed from $195 to $198, the dollar risk on that position shrinks, reducing total heat. When a winning position is scaled up, heat rises even if the per-unit risk stays constant. Calculating heat once at entry and ignoring it thereafter is the most common mistake active traders make.
Alexander Elder’s 6% Rule (from Come Into My Trading Room, 2002) remains the canonical benchmark: risk no more than 2% on any single trade, and never let cumulative open risk exceed 6% of account equity in a given month. When the 6% threshold is hit, stop trading for the rest of the month regardless of setups. This prevents the compounding losses that turn a rough stretch into a catastrophic drawdown.
Practical caps by style: 3% maximum heat for conservative position traders, 6% for active swing traders, up to 10% for short-term scalpers running tight stops and high turnover.
Practical Example
A trader with a $40,000 account opens four swing trades on Monday:
| Position | Entry | Stop | Shares | Dollar Risk | Heat |
|---|---|---|---|---|---|
| Long AAPL | $200 | $195 | 100 | $500 | 1.25% |
| Long NVDA | $875 | $850 | 20 | $500 | 1.25% |
| Long SPY | $525 | $520 | 100 | $500 | 1.25% |
| Short TSLA | $185 | $190 | 33 | $165 | 0.41% |
Total portfolio heat: 4.16% — within a 6% cap, and each position is under 1.5% individually. The setup looks disciplined.
On Tuesday, a surprise Fed statement drops. AAPL, NVDA, and SPY gap down through their stops simultaneously. The three correlated tech-and-market longs deliver a 3.75% single-session hit — not because position sizing was wrong, but because the heat was concentrated in the same correlation bucket. The TSLA short, uncorrelated to the move, gains slightly, but does not offset the damage.
Had the trader capped heat at 3%, only two of those longs would have been open. Had one position been a non-correlated instrument — a gold ETF or a TLT long — the correlated drawdown would have been partially hedged.
August 5, 2024 illustrated this at scale: when the Nikkei/yen carry trade unwound, VIX spiked from 17 to 65 intraday. Traders short volatility alongside equity longs saw correlated losses exceed twice their modeled heat in a single session, because the correlation between those positions surged from near-zero to nearly 1.0 during the shock.
Portfolio heat is the total percentage of your account at risk across all open trades at once. It adds up every position’s stop-loss distance to show your true aggregate exposure, not just the risk on any single trade.
Common Mistakes
- Calculating heat only at entry. As stops are trailed and positions scaled, heat changes continuously. A trader who trailed NVDA’s stop from $850 to $870 has $100 less risk on that position — but if they added shares, heat may have risen instead.
- Treating diversification as a heat reducer. During March 2020 (weeks of March 9–20), S&P 500 sector correlations exceeded 0.85, meaning holding eight “different” equity longs provided almost no heat offset. Diversification reduces heat only when correlations are genuinely low.
- Ignoring funded account drawdown rules. FTMO and most major prop firms enforce a 5% maximum daily loss limit. Traders who don’t map their heat to this ceiling routinely breach it — because a 5% heat level means a single synchronized stop-out wipes the daily limit instantly.
- Using premium paid as options risk. Paying $300 for a call option does not mean your heat contribution is $300. If you would exit the option at a 50% loss, your real heat contribution is $150. Using the wrong figure understates total exposure.
How JournalPlus Tracks Portfolio Heat
JournalPlus calculates portfolio heat in real time across all open positions, summing risk per trade figures and expressing them as a percentage of current account equity. The dashboard flags when heat approaches user-defined thresholds — 3%, 6%, or a custom cap — so traders can see aggregate exposure before placing the next trade, not after a loss has already occurred.
