Level 4: Risk & Money ManagementInteractive
Portfolio Heat & Correlation
18 min readUpdated Mar 2026
is the aggregate risk across all open positions. Even if each trade risks 1%, ten open positions means a potential 10% loss if all stops are hit at once.
Rule: Maximum portfolio heat should not exceed the drawdown you can handle emotionally and financially in a worst case.
Worst-Case Is Worse Than You Think
Portfolio heat assumes stops are hit exactly. During crashes, correlated positions gap through stops at the same time. Actual losses exceed calculated heat. Plan for worse than the math suggests.
Five tech positions feel like five different trades, but a sector selloff hits all five at once. Your diversification is an illusion.
Stocks can open well above or below the previous close, bypassing your stop entirely.
Each open position requires monitoring: news, charts, stops, add/trim decisions. Most part-time swing traders manage 3-6 positions well. 4 well-managed positions beat 10 poorly-monitored ones.
$50,000 account, 6% maximum heat:
Total heat: 4.0%. Room for 2 more at 1% each. But AAPL and NVDA are both tech, so adding another tech stock increases sector concentration. A better pick: healthcare, consumer staples, or utilities.
These circuit breakers prevent a bad streak from becoming catastrophic.
Key Takeaways
Try This
Calculate total portfolio heat for your current open positions (or watchlist). Are any correlated by sector or theme? How would you redistribute to reduce correlation while maintaining the same total heat?
Disclaimer
This educational content is for informational purposes only and does not constitute financial advice. Past performance is not indicative of future results. Trading involves risk of loss. You should consult a qualified financial advisor before making investment decisions. Swingfolio is a trade journaling tool, not a financial advisory service.