Too Much Risk

Portfolio heat is the total open risk summed across every live position. Most books run per-trade sizing without a portfolio-level cap, and the aggregate compounds invisibly.

Portfolio heat is the total open risk across all positions in a book at any one moment. Each strategy contributes some fraction. The aggregate is the "heat".

Most books (retail, at least) track risk at the sub-strategy level. They size each strategy independently, set a fixed-fractional risk per trade, and assume the aggregate behaves.

The failure mode shows up when multiple strategies enter simultaneously. A breakout strategy fires on EURUSD vol expansion. A mean-reversion strategy fires on gold pullback. A trend strategy fires on NAS100 momentum. All three on the same morning. Each one independently sized at 0.5% risk-per-trade. Aggregate book risk is now 1.5% open, going to 2-3% if breakouts continue triggering across instruments through the day.

That number is fine if it's intentional. The problem: most books never set the cap. They run sub-strategy risk discipline without a portfolio-level constraint. Heat compounds invisibly until a correlated stress moment pulls multiple stops together.

I'm saying this because I've lived through it. Heavy portfolio heat can get fairly concerning very quickly.

Why Per-Trade Risk Isn't Enough

Portfolio heat as a hard cap means total open risk, summed across all live positions, has a ceiling. When heat is at the ceiling, new strategies don't enter. Existing positions continue running but no new exposure adds to the book. The cap binds.

Typical ceiling: 3-5% of book equity in open risk. Tight cap. It will block trades that look attractive in isolation. The cap forces strategy entries to compete for the heat budget.

Measuring And Managing Portfolio Heat

Two operational details matter:

How you measure open risk. Distance-to-stop times position size gives you the per-position contribution. Sum across positions for total heat. The harder version weights correlated positions: if two strategies are long related instruments, the combined risk under stress exceeds the sum (regime overlap shows up here too). Most managers start with the simple sum and tighten the cap to account for hidden correlation. Both can work.

What the cap blocks. Some books block any new entry above the cap. Some allow exits but block entries. Some scale down new entries proportionally so the book still participates. Each has trade-offs. The decision belongs in the operations playbook, made before drawdown is testing the book.

Per-trade risk discipline alone can break down at the portfolio level.

The deeper point is that per-trade risk discipline alone can break down at the portfolio level. A book running 20+ strategies needs a portfolio constraint that operates above the strategy logic. Heat is the cleanest way to express that constraint.