Portfolio Heat
Published Last updated
Key Takeaway
The total percentage of account capital currently at risk across all open positions simultaneously, representing the aggregate potential loss if every active trade hit its stop-loss at the same time.
Learn These First
What Is Portfolio Heat?
The total percentage of account capital currently at risk across all open positions simultaneously, representing the aggregate potential loss if every active trade hit its stop-loss at the same time.
How Portfolio Heat Works
Frequently Asked Questions
What is portfolio heat in trading?
Portfolio heat is the total percentage of your account capital currently at risk across all open positions combined. It is calculated by adding the risk percentage of every active trade. If you have three open positions each risking 2% of your account, your portfolio heat is 6%. This metric tells you the maximum loss your account could suffer if every open trade hit its stop-loss at the same time. Portfolio heat gives you a real-time snapshot of total account exposure, enabling you to decide whether adding a new position would push aggregate risk beyond safe limits.
How much portfolio heat is acceptable in crypto trading?
Most professional risk frameworks recommend keeping portfolio heat between 6% and 10% of total account capital under normal conditions. At 6% heat with 2% risk per trade, a trader holds a maximum of three concurrent positions. At 10%, a maximum of five. During volatile market conditions or when multiple open positions share correlated assets — common in crypto markets where assets move together — reducing heat to 4–6% provides meaningful additional protection. When portfolio heat reaches the defined ceiling, no new positions should be opened until existing trades close or move to breakeven, reducing active exposure before adding further risk.
Why does correlation matter for portfolio heat in crypto?
Correlation matters for portfolio heat because cryptocurrency assets tend to move in the same direction simultaneously during broad market events. A trader holding long positions in Bitcoin, Ethereum, and several altcoins may believe they are diversified, but in a crypto-wide crash all positions typically fall together. This means portfolio heat is not a theoretical worst-case scenario — it is a realistic outcome during correlated market crashes. A portfolio heat of 10% across five seemingly different crypto long positions can become a 10% single-day account loss in one market event, making correlation a central factor in portfolio heat assessment.
Common Misconceptions About Portfolio Heat
Managing risk per trade is sufficient without tracking portfolio heat
Risk per trade controls individual position exposure, but without tracking portfolio heat, aggregate exposure can grow dangerously large through multiple simultaneous positions. A trader who disciplines each trade to 2% risk but opens eight concurrent positions has 16% portfolio heat — a level where a single correlated market crash could cause catastrophic damage. Individual trade risk management and portfolio heat monitoring address different layers of the same risk framework. Both must be applied simultaneously; neither alone provides complete protection against account-level drawdowns from concurrent correlated position losses.
Holding different cryptocurrencies eliminates the portfolio heat correlation risk
Holding different cryptocurrency assets does not eliminate portfolio heat correlation risk because most crypto assets are highly correlated during market downturns. Bitcoin, Ethereum, and most altcoins typically fall together during broad crypto market selloffs, meaning long positions across multiple different assets can all hit stop-losses in the same event. True diversification that reduces correlation risk requires positions in genuinely uncorrelated assets across different asset classes. Within cryptocurrency alone, assuming diversification because assets have different names significantly underestimates the correlation risk present in the portfolio during adverse market conditions.
Portfolio heat only matters when you have many open positions
Portfolio heat is relevant from the moment a second position is opened, not only when managing many trades simultaneously. Two positions at 3% risk each produce 6% portfolio heat — already at the upper boundary of conservative risk thresholds. A trader managing two or three concurrent positions without tracking aggregate heat can unknowingly exceed safe exposure levels. The discipline of calculating total portfolio heat before each new entry should be applied regardless of how few positions are open, ensuring no combination of concurrent trades creates unacceptable aggregate risk at any point.