Portfolio heat and total open risk

Portfolio heat is the total amount you would lose if every open position hit its stop today. It is the single number that answers "how much can the market take from me before I get to react?", and most traders have never computed it.

Computing heat

For each open position:

open risk = (current stop distance from entry, or from current price if you prefer the conservative view) × size

Then:

heat = sum of open risk across all positions ÷ account balance

Use the stop as it stands now, not the original stop. A position whose stop has been moved to breakeven contributes zero heat; a position whose stop has been trailed into profit contributes negative heat (locked-in gain), which you can count as zero to stay conservative.

Worked example

Account: $10,000.

Heat = 450 ÷ 10,000 = 4.5%.

So if tomorrow opens badly and every stop fills where it sits, the account loses $450, or 4.5%. That is the number to compare with your rules, not "I only risk 1% per trade".

Key idea: Per-trade risk limits how much one trade can cost you. Heat limits how much one day can cost you. You need both.

Setting a heat limit

A common range for a beginner's maximum heat is 3% to 6% of the account. The right number depends on how correlated your positions usually are (Module 5, lesson 1) and on your daily loss limit (next lesson), because heat is the worst-case daily loss when everything stops out at once.

Once heat is at the limit, adding a new position requires one of:

1. Closing an existing position.
2. Tightening an existing stop (which reduces its open risk).
3. Taking the new position at a smaller size, so that total heat stays under the cap.
4. Not taking it.

Option 4 is chosen far too rarely. The new setup is not more valuable than the ones already on.

Heat and correlation together

In the worked example, Stock A, Stock B, MES and Stock C are all long equities. Their combined open risk is $400 of the $450. On a risk-off day those four stops are likely to go together. If the plan caps risk per theme at 3% ($300), this book is over the theme cap even though it is under a 5% heat cap. Both checks have to pass.

Open profit is not reduced risk

A position that is up 3R with the stop still at the original level has open risk of 1R. The profit exists on the screen; the risk exists in the stop. It becomes reduced risk only when the stop moves. Many traders count unrealised profit as a cushion, add positions against it, and then watch a reversal take both the cushion and the new positions. Count heat from stops, never from open P&L.

A daily habit

Every morning before the open, and every time you add a position:

1. List open positions with their current stops.
2. Compute open risk for each and sum.
3. Compute heat as a percentage of the current balance.
4. Compute risk per theme.
5. If either number is over the limit, fix it before doing anything else.

This takes two minutes in a spreadsheet and is the closest thing to a seatbelt that a discretionary trader has.

Try it: Build a five-row heat table like the one above in a spreadsheet, with columns for size, entry, stop and open risk, and a cell that divides the total by your balance. Enter your actual positions. Then move one stop to breakeven and watch heat drop; move it back and add a sixth position, and watch it breach the cap.

Recap

• Heat = sum of open risk to current stops ÷ account balance; it is the worst-case loss if everything stops out today.
• Positions with stops at breakeven contribute zero heat; open profit does not reduce heat until the stop moves.
• Cap heat at roughly 3% to 6%; when at the cap, close, tighten, shrink or skip.
• Check heat and per-theme risk together; a book can pass one and fail the other.
• Recompute every morning and before every new position.