Open this calculator on its own page
🔥 Portfolio Heat Calculator
Heat is the most a book can lose, not what it usually does. Lesson 72 asks the question that matters: how often is the maximum the outcome?
Position 1
Position 2 (Optional)
Position 3 (Optional)
💡 Portfolio Heat Rules
✅ 0-6%: Safe zone
⚠️ 6-8%: Proceed with caution
🚨 >8%: DANGER - Stop taking new trades
Portfolio Heat: Your Account's Real Risk Exposure
You think you're "diversified" across 5 positions. But if they're all tech stocks, they'll ALL dump on the same day. Portfolio heat shows your TRUE risk.
🚨 The Hidden Danger
5 positions × 2% risk each = 10% portfolio heat
One sector rotation, one Fed announcement, one macro shock. And ALL your stops get hit. That's not 2% loss. That's 10%.
Real Example: March 2020 COVID Crash
Trader had 6 "diversified" positions:
- AAPL, MSFT, GOOGL (tech)
- JPM, BAC (banks)
- DIS (entertainment)
Portfolio heat: 12% (2% per trade)
March 12, 2020: ALL positions hit stops in ONE day. Lost 12% in 6 hours.
💎 Professional Standard
- 6% max portfolio heat for retail traders
- 10% max for professionals with hedges
- 15% max for prop firms with tight risk controls
The day every stop hits
Heat is a maximum. Five positions risking one per cent each lose five per cent when all five stops hit, and no amount of correlation makes that number larger. What correlation decides is how often five per cent is the day you actually get.
Lesson 72 prices exactly this, on four positions at two per cent each:
| Nominal heat | 8% | the most the book can lose |
| Daily standard deviation | 7.84% | 98% of the maximum |
| All four against you, correlated at 0.9472 | 40.53% | one day in 2.5 |
| All four against you, independent | 6.25% | one day in 16 |
The maximum did not move. It stopped being rare, which is a harder problem, because it is the difference between a drawdown you read about and a drawdown you have to sit through.
So the question to ask of a heat figure is not whether it is under some threshold. It is: how often is this the outcome? The correlation calculator on this page answers that, and reproduces the lesson's figures exactly.
Educational only. Trading involves substantial risk of loss. Not financial advice. Past performance does not guarantee future results.
Professional Portfolio Heat Rules
Rule 1: Never Exceed 6-8% Heat
If your total portfolio heat exceeds 6%, STOP taking new trades. Wait for a position to close.
- Retail traders: 6% max
- Experienced traders: 8% max
- Prop traders with hedges: 10% max
Rule 2: Account for Correlation
If your positions are correlated (same sector, same trend direction), reduce heat limit to 4-5%.
Example: 3 tech longs + 2 energy shorts = highly correlated. Max 5% heat.
Rule 3: Reduce Heat Before Events
Cut portfolio heat by 50% before:
- FOMC meetings
- CPI/NFP releases
- Earnings (if holding stocks)
- Weekends (if uncomfortable)
Rule 4: Track Daily
Calculate portfolio heat EVERY morning before taking new trades. Make it part of your pre-market routine.
Bookmark this calculator and use it daily.