A Sydney trader runs six open positions simultaneously. Each risks 2% of capital. Individually, that looks disciplined. Collectively, that is 12% of the entire account exposed at once — and if those positions are correlated, a single market shock can detonate all six simultaneously. The account drops 12% before a single stop is questioned.

This concept has a name: portfolio heat. It is the aggregate risk across every open position at any given moment. The Turtle Traders, Richard Dennis's famous systematic trading group from the 1980s, treated portfolio heat as a hard ceiling — not a guideline. Their rules capped total exposure precisely because they understood that individual position sizing means nothing without measuring the whole.

CONCEPTPortfolio heat = sum of all open position risk expressed as % of total account equity.
WARNINGCorrelated positions don't diversify risk — they concentrate it. Six trades can behave like one.
KEY IDEAThe Turtles capped portfolio heat at 20% total account risk across all open trades.

The Turtle system used a unit-based approach. Each unit risked approximately 1% of account equity, measured using ATR (Average True Range) to normalise volatility across different markets. A trader could hold a maximum of 4 units per market, 6 units per correlated sector, and 10–12 units across all positions — hard limits that kept total portfolio heat within survivable bounds regardless of how many signals fired.

Portfolio Heat: Correlated vs Uncorrelated (6 Positions) Account Risk % 12% Correlated Positions 6% Low Correlation 2.5% Heat-Capped Portfolio 0% 6% 12%

Practical implementation follows a straightforward formula. Calculate each position's dollar risk (entry price minus stop loss, multiplied by position size). Sum every open trade's dollar risk. Divide by total account equity. That percentage is your portfolio heat. Many systematic traders set a maximum of 15–20% total heat, reducing new position size or skipping new signals entirely once the ceiling is reached. The mechanics of position sizing and the history of Turtle trading both reinforce this ceiling-based thinking, as does the broader framework of drawdown management that every serious systematic trader studies.

A 20% drawdown requires a 25% gain to recover. A 40% drawdown requires 67%. Portfolio heat is what keeps those numbers theoretical.

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.