Portfolio Heat

Portfolio heat is a risk management framework borrowed from professional trading that quantifies your total exposure to loss at any given moment. If you have three open positions each risking 2% of your portfolio (from current price to your defined stop-loss), your portfolio heat is 6%. If you add three more similar positions, heat rises to 12%. Most professional traders keep total heat below 10–15% at all times, ensuring that even if every position hits its stop-loss simultaneously (a rare but possible scenario), total portfolio damage is capped at a manageable level.

The calculation per position: heat contribution = position size (% of portfolio) × distance to stop (% from entry). Example: 5% portfolio position with a stop-loss 10% below entry contributes 0.5% heat. A 10% position with a 20% stop contributes 2% heat. This framework reveals how a portfolio of seemingly small positions can accumulate dangerous total risk if stops are loose or positions are large. A diversified portfolio of 20 altcoins each sized at 5% with loose 30% stops has 30% portfolio heat — meaning a broad market decline hitting all stops simultaneously could cut the portfolio by nearly a third in a single session.

Portfolio heat management naturally forces discipline about adding positions in late-stage bull runs when most positions are open. When heat is high, new opportunities must wait — you can only add new exposure by closing existing positions first. This prevents the common mistake of adding maximum exposure exactly when markets are most euphoric and risk is highest. The Bear Market Checklist and Altcoin Rules on Alpha Factory are designed to help manage portfolio heat through market cycle transitions.