Ask any algorithmic trader what killed their account and the answer is rarely one bad trade. It's six strategies all going wrong simultaneously, all in the same direction, all because nobody was watching the total exposure. Portfolio heat management is exactly that watchdog — and it's surprisingly easy to ignore until it's too late.

Portfolio heat refers to the aggregate risk your entire system carries at any given moment across all running strategies. Think of it like electrical circuits in your house. Each appliance draws power safely on its own. But run the oven, dryer, air con, and pool pump simultaneously and you trip the breaker. Your strategies are the appliances. Portfolio heat is the total draw on that circuit.

CONCEPTPortfolio heat = total open risk exposure across every concurrent strategy, measured as a single unified number.
WARNINGStrategies that look uncorrelated in calm markets often spike toward correlation 1.0 during drawdowns — exactly when it hurts most.
KEY IDEAEnforcing a hard heat ceiling at the system level prevents any single volatility event from wiping gains across your entire portfolio.

The mechanics of measuring heat involve summing the risk-weighted exposure of each open position across all strategies. A common approach is expressing each position's risk as a percentage of total account equity — say, 0.5% per trade — then capping the total system heat at something like 6% to 8%. When that ceiling is hit, new signals from any strategy are simply blocked until heat drops.

Aggregate Portfolio Heat by StrategyHeat LimitStrat AStrat BStrat CStrat D8%4%0%

Enforcing heat limits requires a centralised risk layer — a separate module that sits above all individual strategy engines and holds veto power over order submission. This is architecture, not just maths. Without a single source of truth for current exposure, two strategies can simultaneously calculate they're within limits and both fire, jointly breaching the ceiling. The fix is a shared state object that all strategies query before placing any order. For deeper reading on position sizing mechanics, Investopedia's position sizing explainer is a solid starting point, while the broader framework of systematic risk management on Wikipedia covers the portfolio-level thinking behind it. Those wanting the academic grounding should also look at Value at Risk methodology, which underpins how institutional desks quantify aggregate exposure precisely.

Build your heat ceiling before you run live — not after your first simultaneous drawdown across four strategies teaches you the hard way.

This content is for educational purposes only and does not constitute financial product advice. Past performance is not indicative of future results. Profit Logic Ltd (ACN 688 669 936) accepts no responsibility for errors or omissions in this content or anywhere on this website. Always seek advice from a licensed financial adviser before making investment decisions.