You risk 1% per trade. Every position is sized from its stop distance, every stop sits at structure, every rule is honoured. Then a Tuesday arrives where seven positions are open at once, correlated news hits, and the account is down 6.5% by lunch. Nothing was violated. Each trade was correct. The failure was not in any position; it was in their sum. That sum has a name: portfolio heat.
What Portfolio Heat Measures
Portfolio heat is the total risk currently exposed across all open positions, expressed as a percentage of account equity. If you hold four positions each risking 1% to their stops, your heat is 4%. It is the number that answers the only question that matters when the market gaps: if every open stop is hit today, what does the account look like tonight?
Per-trade sizing cannot answer that question, because per-trade sizing does not know how many trades there are. Fixed fractional sizing is a per-position rule and it is necessary, but it is not sufficient. Ten correct 1% positions are a 10% loss waiting for a bad morning, and bad mornings are not rare.
The 6% Convention
A widely used cap in trading education, associated with Alexander Elder’s writing on risk, sets total open risk at 6% of equity. Six is a convention rather than a law derived from your specific system. What makes it useful is its structure: it forces the trader to treat open risk as a finite budget that positions compete for, instead of an unbounded number that accumulates by accident.
The mechanics are simple. Before entering, compute the trade’s risk as a percentage of equity, add it to the risk already open, and refuse the trade if the total would breach the cap. When a position moves to a stop at breakeven, its contribution to heat drops toward zero and budget is released. Heat is therefore dynamic, and checking it is a routine, not a one-time calculation.
DO THIS
Cap total open risk at 6% of equity, and cap correlated-group risk lower, around 2% to 3% per driver. Before every entry, sum the risk of all open positions plus the proposed one. If it breaches the cap, the trade does not get taken, no matter how good it looks. The best setup of the week is not worth suspending the rule that keeps you solvent for next week.
Correlation Is the Trap Inside the Trap
Heat computed by ticker understates heat computed by driver. Long gold, long silver, short the dollar and long a gold miner are not four 1% positions. They are one position with four tickets, and on the day the dollar rips, all four stops run together. The account discovers that its 4% of “diversified” heat was 4% of a single bet.
The correct unit of measurement is therefore the underlying driver, not the instrument. Group positions by what actually moves them: dollar direction, rate expectations, one sector’s earnings cycle, one crypto beta. Cap exposure per group. The full mechanics of this are laid out in correlation risk, and it is the reason the group cap sits well below the total cap.
Heat, Drawdown and Ruin
Portfolio heat is the bridge between per-trade risk and account-level survival. Uncapped heat is how a trader with disciplined 1% sizing still produces a 20% drawdown from a single correlated event, and drawdowns of that depth change behaviour long before they threaten risk of ruin. A trader nursing a 20% hole trades differently, worse, and usually larger.
The cap also imposes a useful discipline on selection. When heat is scarce, marginal setups stop being free. You must decide whether this trade deserves the budget more than the one you might see tomorrow, which is precisely the kind of thinking a professional does and an overtrader never has to.
On the Trader’s Roadmap, portfolio heat is a tier-five Money node requiring both correlation risk and fixed fractional sizing, and it gates pyramiding above it. The order is not negotiable: adding to winners without a heat cap is how a good trade becomes an ungoverned one.
Prop traders live and die by aggregate risk. Model yours with the prop firm risk calculator, and see what heat unlocks on the Trader’s Roadmap.
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