Portfolio Heat

Portfolio heat is the total percentage of account equity at risk across all open positions simultaneously — what you would lose if every stop were hit at once. Unlike per-trade risk, which manages individual position sizing, portfolio heat is a risk metric that captures the aggregate, systemic exposure a trader carries at any moment. It sits at the intersection of position sizing, correlation, and drawdown control.

Formula & Calculation

Portfolio Heat (%) = Sum of [(Entry Price − Stop Price) × Shares] / Account Equity × 100

Where:

• Position Risk ($) = (Entry Price − Stop Price) × Number of Shares held
• Account Equity = Current total value of the account, including open unrealized P&L
• Sum = Every open position, regardless of size or direction

To calculate: for each open trade, subtract the stop price from the entry price, multiply by the number of shares, and sum all results. Divide by current account equity and multiply by 100 to express as a percentage. Recalculate any time a stop is moved, a partial exit is taken, or a new position is added.

Benchmarks

Level	Range	What It Means
Controlled	Under 6%	Conservative exposure; room to add positions or absorb slippage
Acceptable	6% – 10%	At the professional ceiling; no new positions should be added
Elevated	10% – 15%	Vulnerable to correlated selloffs; one macro event can cause severe damage
Dangerous	Above 15%	Prop firms terminate accounts at this level; single-event blowup risk

Practical Example

A $50,000 trader enters three positions Tuesday morning: (1) Long SPY at $510, stop at $506, 100 shares — risk $400 (0.80%); (2) Long AAPL at $195, stop at $192, 150 shares — risk $450 (0.90%); (3) Long QQQ at $430, stop at $426, 80 shares — risk $320 (0.64%).

Simple arithmetic heat: ($400 + $450 + $320) / $50,000 = $1,170 / $50,000 = 2.34%. That appears well within safe limits.

However, SPY and QQQ carry a 0.90–0.95 rolling correlation, and AAPL moves closely with both during macro events. These are not three independent risks — they are one concentrated large-cap US equity bet. On Wednesday, the Fed delivers a hawkish surprise. SPY gaps to $504 (below the $506 stop), AAPL opens at $190 (below $192), QQQ opens at $423 (below $426). All three stops gap through simultaneously.

Actual loss: ($510 − $504) × 100 + ($195 − $190) × 150 + ($430 − $423) × 80 = $600 + $750 + $560 = $1,910, or 3.82% — a 63% larger loss than the calculated 2.34% heat, in a single session. In March 2020, when the S&P 500 fell 34% in 33 days, traders carrying similar correlated long clusters saw all positions stop out in sequence across consecutive gap-down opens.

How to Track Portfolio Heat

1. Log entry price, stop price, and share count at entry — these three values define your position risk dollar amount from the start
2. Calculate position risk in dollars — (entry − stop) × shares for each open trade; update whenever a stop is adjusted
3. Sum all open position risks and divide by current equity — not opening-day equity, but today’s account value
4. Flag correlation clusters — group positions by instrument type (large-cap equities, commodities, currencies) and apply a 1.5–2x multiplier to the cluster’s combined heat
5. Recalculate after every trade event — new entry, partial exit, stop move, or end-of-day equity mark all require a fresh heat number

How to Improve Portfolio Heat

1. Cap per-trade risk at 1–2% — at 1.5% per trade, you can hold four positions before reaching 6% heat, giving you a natural buffer before the ceiling
2. Diversify across uncorrelated instruments — a long equity position paired with a short crude oil futures trade carries far lower correlated heat than two equity longs; SPY and QQQ at 0.93 correlation provide almost no diversification benefit
3. Trail stops to breakeven after a 1R move — a position at breakeven contributes zero heat to the portfolio, letting you hold winners without increasing aggregate risk
4. Scale out at 1R — exiting 50% of a position at 1R profit immediately cuts that position’s heat contribution in half, lowering total portfolio heat while keeping upside exposure
5. Impose a position-count ceiling consistent with your per-trade risk — if you risk 2% per trade, your hard cap is five concurrent positions before breaching 10% heat; enforce this mechanically, not discretionally

Common Mistakes

1. Treating correlated positions as independent risks — holding SPY, QQQ, and AAPL simultaneously is not three 2% risks; during a CPI print or Fed announcement, all three move together, and effective heat can be 1.5–2x the arithmetic sum
2. Calculating heat only at trade entry — heat is dynamic; as stops trail up on winning trades and equity fluctuates, the true heat percentage changes continuously throughout the session
3. Using account balance instead of current equity — if the account is already down 8% from a prior drawdown, heat must be calculated against the reduced equity base, not the original deposit
4. Ignoring gap risk on overnight positions — intraday heat calculations assume fills at stop prices; gap-down opens can result in fills 2–5% below the stop, transforming a 2.34% calculated heat into a 3.82% actual loss, as shown in the example above

How JournalPlus Calculates Portfolio Heat

JournalPlus tracks portfolio heat in real-time from your trade log, automatically summing open position risks based on your logged entry prices, stop levels, and share counts. The analytics dashboard displays current portfolio heat as a percentage of account equity and highlights positions in the same correlation cluster — for example, flagging multiple large-cap equity longs that move together. As you update stops or close partial positions, the heat figure refreshes immediately. The performance charts also show historical heat levels overlaid with drawdown periods, so you can identify whether past drawdowns coincided with elevated heat and adjust future position-count limits accordingly.

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Related metrics: Risk Per Trade · Risk of Ruin · Value at Risk · Risk-Reward Ratio