Portfolio Heat
The total amount at risk across every open position at once. Individually sensible positions can add to an exposure nobody chose.
MadStockAlerts Research · Updated August 28, 2026
What to take away
- Heat is the sum of what would be lost if every open position hit its exit.
- Correlated positions are closer to one position than to several.
- A cap on total heat is an account-level rule rather than a trade-level one.
- Adding a position to a full book requires reducing another.
- The measure assumes every exit is reachable, which is what a gap breaks.
MAD Academy Training Video · 0:46
Add Up What You Would Lose Today
Portfolio heat is the total risk across every open position, and it is the number that stops a good rule from failing in aggregate.
This lesson is part of a Stock Alerts + Tools plan.
The measure
portfolio heat = sum of (entry - exit) x shares, across every open position
- expressed as a percentage of the account
- it is the loss if everything currently open reached its exit
Eight positions each risking one percent produce eight percent of heat. Whether that is acceptable is a decision, and the point of the measure is that it is a decision rather than an accident.
Correlation makes the number understate it
The sum assumes the positions are independent. Where several share an exposure, they will reach their exits together, and the effective risk is closer to that of one larger position.
Scroll the chart sideways to see all of it.
The practical adjustment is to compute heat by exposure rather than by position. That produces a smaller number of larger figures and is a much better description of what a bad day costs.
Using it as a constraint
- A cap on total heat means a new position requires capacity, which sometimes means closing something else.
- That forces a comparison between the new idea and the weakest existing one, which is a useful discipline.
- It also caps the worst plausible day, which no per-trade rule does.
- It is an account-level rule, and account-level rules are the ones most plans omit.
What the measure assumes
Heat assumes every exit is reachable at the exit price. A gap, a halt or a limit move breaks that assumption for every position at once, and correlated positions gap together. The measure is a floor on the bad case rather than a description of it.
Choosing a cap
A heat cap is an account-level rule and, like every rule in this pillar, its value comes from being decided in advance rather than from the specific number.
| Consideration | What it implies |
|---|---|
| The worst plausible day | Correlated positions reaching their exits together |
| Whether exits are reachable | A gap makes the realised loss larger than the computed heat |
| How the cap interacts with sizing | A tighter cap means fewer positions, larger ones, or both |
| What a breach requires | Closing something before opening something new |
The fourth row is where the rule does its work. Requiring capacity for a new position forces an explicit comparison against the weakest existing one, which is a decision most processes never make.
The number itself varies enormously by circumstance and is not something this library will suggest. What can be said is that a process with no cap has an implicit one, set by whatever positions happened to be open.