Portfolio Heat
By Menno — 13 years in crypto, 3 bear markets survived, zero paid promotions
Last updated: March 2026
Portfolio heat is the total percentage of a portfolio currently at risk across all open positions. It's calculated as the sum of each position's risk (entry to stop-loss distance × position size as % of portfolio), and should typically stay below 10–15%.
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.
Frequently Asked Questions
What portfolio heat level is appropriate for crypto?
Context-dependent. During strong bull markets with clear trends, experienced traders may run 15–20% heat. During uncertain conditions or late bull stages, 5–10% is more appropriate. During bear markets or high uncertainty (macro stress, regulatory news), some professionals run 0–5% heat or exit to cash entirely. The key is having a defined maximum level and never exceeding it.
How is portfolio heat different from portfolio allocation?
Allocation is the percentage of your portfolio invested (e.g., 60% in crypto assets). Heat is the percentage at risk from current prices to stop-losses. A 10% position in BTC with a very tight stop 1% below entry contributes 0.1% heat — negligible. The same 10% position with a 50% stop-loss contributes 5% heat — significant. Heat depends on both size AND risk distance.
Related Tools on Alpha Factory
Related Terms
Position Sizing
Position sizing is the process of determining how much capital to allocate to a single trade or investment, balancing potential reward against the risk of loss.
Stop Loss
A stop loss is an order that automatically sells your position when the price drops to a specified level, limiting your potential losses. It's a risk management tool that removes emotion from selling decisions.
Risk/Reward Ratio
The risk/reward ratio compares the potential loss on a trade (from entry to stop-loss) against the potential gain (from entry to take-profit), expressed as a ratio like 1:2 or 1:3.
Maximum Drawdown
Maximum drawdown (MDD) is the largest peak-to-trough decline in a portfolio's value over a given period, expressed as a percentage. It measures the worst-case loss experienced by an investor who entered at the worst possible time.
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