portfolio heat meaning in trading

Portfolio heat is the sum of the risk on every open position — what you would lose if every stop were hit on the same day. Eight positions each risking 1% of capital is 8% of heat, not 1%. That arithmetic is how a trader who sizes each individual trade correctly still takes an 8% hit in a single week.

what is a typical cap on total open risk

Around 5–6% of capital in total open risk is a commonly cited professional ceiling, with roughly 2–3% as a further limit on any one sector. These are conventions rather than regulations, and the value of writing one down in advance is that it is the first rule people abandon when a good-looking setup appears at the moment the book is already full.

four bank positions and two NBFC positions in the same book are really

One bet on Indian credit conditions. They span six tickers but share a single driver, so one RBI decision or asset-quality scare hits every one of them in the same session. Correlated positions are one bet however many symbols they cover, which is why sector heat is capped separately from total heat.

what happens to correlation in a market crash

In a genuine market-wide sell-off, correlations converge towards one — positions that normally move independently fall together. The diversification you carefully constructed stops helping at precisely the moment you need it most. That is not an argument against diversifying; it is the argument for capping total heat, because heat is the protection that still works when everything moves in the same direction.

Portfolio heat and total open risk

You have learned to size a single position so that being wrong costs 1% of capital. What happens when you hold eight positions at once — and four of them are banks?

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Heat: total open risk

Portfolio heat = Σ (risk on each open position)

Eight positions at 1% each: Heat of 8% — not 1%
Typical professional cap: Around 5–6% total open risk

Example: If every stop is hit — which happens on genuinely bad days — you lose the whole heat number at once. Sizing each trade correctly and ignoring the total is how disciplined traders still take an 8% hit in a week.

Correlation makes it worse

Eight uncorrelated positions rarely all stop out together. Four banks and two NBFCs are not six positions — they are one bet on Indian credit conditions, and an RBI decision or an asset-quality scare hits every one of them in the same session.

1
Cap total heat
Pick a number — 5% or 6% is common — and stop taking new positions when you reach it, however good the setup looks. This is the rule that gets abandoned first and matters most.
2
Cap sector heat separately
No more than roughly 2–3% of total risk in any one sector. This is what stops four correlated positions becoming one oversized bet by accident.
3
Count the index as a sector
If you are long the NIFTY and long five largecaps, you have concentrated exposure to the same thing twice.
4
Reduce heat in a losing streak
After a defined drawdown, halve position sizes until you make it back. Not because the system stopped working — because the environment may have changed and smaller size buys you time to find out.

Adding to winners without adding heat

A useful technique: once a position has moved in your favour and you have trailed the stop above your entry, that position’s risk is no longer 1% — it may be zero or negative. It has stopped consuming heat, which frees capacity for a new position without raising your total exposure.

◆ Checkpoint

Managing the book

2 questions. Answers are revealed once you submit all of them.

1.You hold six positions risking 1% each, of which four are banks. What is your real exposure?

2.Why does trailing a stop above entry free up capacity for a new trade?

0 of 2 answered

Simple bhasha mein

Paanch gas burner

Ek saath paanch cheezein gas pe chadha do — kuch jal jaayega. Do-teen sambhal jaate hain. Trading mein bhi wahi: har position ko dhyaan chahiye. Zyada trade matlab zyada dhyaan bata hua, aur usi mein sabse achha wala jal jaata hai.

What to remember

Eight positions at 1% each is 8% of heat, not 1%.
Cap total heat around 5–6%, and sector heat around 2–3%.
Correlated positions are one bet however many tickers they span.
In a crash correlations converge to one — heat is the protection that still works.
Trailing a stop above entry frees heat, so heat rather than position count is the constraint.

You reached the endMark it done and keep your streak going.

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Common questions

Short, direct answers to what people ask about this topic.

portfolio heat meaning in trading: Portfolio heat is the sum of the risk on every open position — what you would lose if every stop were hit on the same day. Eight positions each risking 1% of capital is 8% of heat, not 1%. That arithmetic is how a trader who sizes each individual trade correctly still takes an 8% hit in a single week.
what is a typical cap on total open risk: Around 5–6% of capital in total open risk is a commonly cited professional ceiling, with roughly 2–3% as a further limit on any one sector. These are conventions rather than regulations, and the value of writing one down in advance is that it is the first rule people abandon when a good-looking setup appears at the moment the book is already full.
four bank positions and two NBFC positions in the same book are really: One bet on Indian credit conditions. They span six tickers but share a single driver, so one RBI decision or asset-quality scare hits every one of them in the same session. Correlated positions are one bet however many symbols they cover, which is why sector heat is capped separately from total heat.
why does trailing a stop above entry free up capacity for another trade: Because heat measures what you lose if every stop is hit, and a stop sitting above your entry means that position would cost you nothing — its contribution to portfolio heat is zero or negative. Total open risk has therefore fallen even though the trade is still open, so another position can be added without raising overall exposure. This is why heat rather than position count is the useful constraint.
what happens to correlation in a market crash: In a genuine market-wide sell-off, correlations converge towards one — positions that normally move independently fall together. The diversification you carefully constructed stops helping at precisely the moment you need it most. That is not an argument against diversifying; it is the argument for capping total heat, because heat is the protection that still works when everything moves in the same direction.