What Portfolio Heat Is
Portfolio heat measures the total amount of capital at risk across all your open positions at any point in time. It is expressed as a percentage of your total account equity.
Where individual position risk tells you how much you could lose on a single trade, portfolio heat tells you how much you could lose if every open position hit its stop loss simultaneously. It is your aggregate risk exposure.
Most traders manage risk at the individual trade level -- "I will risk 2% per trade" -- but forget to manage risk at the portfolio level. Portfolio heat fills that gap.
How to Calculate Portfolio Heat
The formula:
Portfolio Heat (%) = Sum of all open position risks / Account Equity x 100
Where each position's risk = Position Size x Distance to Stop Loss (as a decimal).
Here is a worked example with three open positions in a $50,000 account:
Position 1: BHP.AU
- Bought 200 shares at $45.00 = $9,000 position
- Stop loss at $43.50 (3.33% below entry)
- Risk = $9,000 x 0.0333 = $300
Position 2: WBC.AU
- Bought 150 shares at $28.00 = $4,200 position
- Stop loss at $26.60 (5.0% below entry)
- Risk = $4,200 x 0.050 = $210
Position 3: FMG.AU
- Bought 100 shares at $22.00 = $2,200 position
- Stop loss at $20.90 (5.0% below entry)
- Risk = $2,200 x 0.050 = $110
Total risk = $300 + $210 + $110 = $620
Portfolio Heat = $620 / $50,000 x 100 = 1.24%
With 1.24% heat, even if all three stops were hit at the same time, the total loss would be $620 -- just over 1% of the account. That is conservative.
Use our free portfolio heat calculator to run this calculation for your own positions.
Why It Matters
Portfolio heat acts as a circuit breaker for your account. Without it, you can end up in a situation where each individual trade meets your risk rules but the combined exposure is dangerously high.
Consider a trader who risks 2% per trade. If they open five positions, their portfolio heat is 10%. If they open ten positions, it is 20%. A market-wide selloff that hits all stops simultaneously -- not uncommon during events like the COVID crash or sudden RBA announcements -- would cause a 20% drawdown in a single day.
That 20% drawdown then requires a 25% gain to recover. And it happened because the trader was managing risk at the position level while ignoring risk at the portfolio level.
Portfolio heat prevents this. By setting a maximum heat level and checking it before every new trade, you ensure your total risk stays within bounds regardless of how many positions you hold.
Practical Guidelines
Under 6% -- Conservative. This is appropriate for capital preservation strategies, SMSF accounts, or traders who prioritise steady growth over aggressive returns. At 6% heat, even a worst-case scenario where every position stops out results in a manageable drawdown.
6-10% -- Moderate. The most common range for active swing traders. It allows for four to five positions at 2% risk each, which provides diversification without excessive exposure. Most swing traders on the ASX operate comfortably in this range.
Above 10% -- Aggressive. Heat above 10% means a bad day in the market could cost you more than 10% of your account. This level is only appropriate for short-term traders with very tight stops and high conviction setups. If you are running heat above 10% consistently, you are either over-positioned or your stop distances are too wide.
The Correlation Problem
Portfolio heat assumes independent positions, but in practice, stocks are correlated. If you hold BHP.AU, RIO.AU, and FMG.AU, you have three positions in iron ore miners. A drop in the iron ore price hits all three simultaneously.
Correlated positions amplify your effective heat. Three mining stocks with 2% risk each is not 6% heat in practical terms -- it is closer to a single position with 6% risk, because the catalyst that stops out one is likely to stop out all three.
To manage this, consider sector concentration alongside raw heat numbers. A portfolio with 8% heat spread across four sectors (banking, mining, tech, healthcare) is genuinely diversified. A portfolio with 8% heat concentrated in two mining stocks and one energy stock is not.
How to Reduce Heat When It Is Too High
If your portfolio heat exceeds your limit, you have four options:
1. Do not open new positions. The simplest approach. Wait until existing positions either hit their target (reducing your open position count) or trail their stops to breakeven (reducing risk per position to zero).
2. Tighten stops on existing positions. If a position has moved in your favour, trailing the stop closer to the current price reduces its risk contribution. A position where the stop is at breakeven contributes zero heat.
3. Reduce position sizes. If you are about to enter a new trade and it would push heat above your limit, enter with fewer shares. You still get exposure to the trade but with less risk.
4. Close the weakest position. If you need to make room for a better opportunity, close the position that has the weakest thesis or the worst risk-reward profile going forward. This frees up both capital and heat capacity.
Portfolio Heat and Position Sizing
Portfolio heat and position sizing are connected but separate concepts.
Position sizing answers: "How many shares should I buy on this trade?"
Portfolio heat answers: "Am I allowed to take this trade at all, given my existing exposure?"
A disciplined process checks both. First, calculate position size based on your per-trade risk rule (e.g., risk 2% of account, divide by stop distance). Then check whether adding that position would push portfolio heat above your maximum. If it would, reduce the position size or skip the trade.
This two-layer approach -- position sizing for individual trades, portfolio heat for aggregate risk -- is how professional traders manage risk. Neither layer alone is sufficient.
Tracking Portfolio Heat in SwingFolio
SwingFolio tracks your portfolio heat automatically. The dashboard displays current heat based on your open positions and their stop loss levels. As you add new trades or adjust stops, the heat reading updates in real time.
This removes the manual spreadsheet calculation and makes it easy to check your aggregate risk before entering a new position. If you are approaching your heat limit, you know before you commit capital -- not after.