Portfolio heat: capping your total risk

The thermometer for your whole book

Per-trade risk only tells you the temperature of one trade. Portfolio heat tells you the temperature of your whole book. The definition: portfolio heat is the sum of dollars at risk across every open position, expressed as a percentage of your current equity. If you have five trades open at 1% risk each, your heat is 5%. If you have ten, your heat is 10%.

Why this matters more than per-trade sizing alone. Markets move in clusters. On a risk-off day, almost every long position gets hit at once. On a Euro-news day, all your Euro pairs move together. Per-trade risk feels safe because it caps the single-trade loss. Portfolio heat caps what a bad day in the market can do to you across everything you have on at once.

The standard cap for most active retail traders is 6 to 10 percent. Some prop desks run lower (4 to 6 percent) during uncertain market regimes. Picking your cap is a function of two questions. What's your maximum tolerable drawdown in a single bad week? And how many independent setups do you actually find in a typical week? Cap heat at the larger of those two answers, and you'll find yourself naturally choosing the best trades instead of every trade.

Concrete example. Account is $500, you cap heat at 8%, that's $40 total at risk across all open positions. At 1% per trade ($5), you can have eight trades open at once before hitting the cap. After applying correlation haircuts from the prior lesson, you might fit nine or ten in if some are cross-bucket. Track heat in a simple spreadsheet column: one cell per open trade, one sum cell at the bottom. Glance at it before every new entry. Recap: per-trade caps one loss, heat caps total exposure, and 6-10% is the working range.