Managing Portfolio Heat
Portfolio heat refers to your total risk exposure across all positions. Managing it effectively is crucial for long-term survival and success.
Understanding Portfolio Heat
Definition: Portfolio heat is the sum of potential losses from all open positions if they hit their stop losses simultaneously.
Heat Management Strategies
Implement these strategies to control portfolio heat:
- Set maximum portfolio heat limits
- Diversify across uncorrelated assets
- Scale position sizes based on correlation
- Monitor sector and market exposure
Advanced Heat Metrics
- Correlation-adjusted position sizing
- Value at Risk (VaR) calculations
- Beta-weighted portfolio exposure
- Sector concentration risk
Pro Tip: Consider reducing position sizes when correlations between your positions increase.