Portfolio heat is the estimated percentage of account equity that would be lost if every open position reached its planned stop. It converts several trades into one account-level risk number. The measure is useful only when stops are realistic, sizes are current, and slippage or correlation are not ignored.

Key takeaways

• Portfolio heat adds the planned loss of all active positions and divides by account equity.
• It measures loss at defined exits, not maximum possible loss or liquidation risk.
• A mental stop makes the calculation unreliable because it has no enforceable price.
• Correlated crypto positions can reach their stops together.
• Slippage, fees, and gaps should be included as a buffer.
• Pending orders need a separate “if filled” heat scenario.
• DRKN can help review position risk and alerts without making the trade decision.

How is portfolio heat calculated?

For a linear futures position, estimate risk to stop:

Position risk = |Entry price − Stop price| × Quantity + estimated costs

Then calculate:

Portfolio heat = Sum of position risks ÷ Account equity × 100

Assume a $25,000 account has three trades. BTC risks $300 at its stop, ETH risks $250, and SOL risks $200. Estimated fees and slippage add $75. Total planned risk is $825, so heat is 825 / 25,000 × 100 = 3.3%.

This does not mean the account can lose only 3.3%. Stops may slip, a venue can fail, or a trader may cancel an exit. It means the current plan targets roughly that loss if the stated assumptions hold. The value is its discipline: risk becomes visible before another position is added.

Why is portfolio heat different from gross exposure?

Gross exposure measures total position notional. Portfolio heat measures planned loss to exits. A large notional with a close, credible stop can have lower planned heat than a smaller notional with a distant stop. Both numbers are needed because the close stop may still suffer severe slippage in a thin market.

For example, two $10,000 positions create $20,000 gross exposure. If each risks $100 to stop, heat contribution is $200. Another $5,000 position with a 10% stop distance risks $500 by itself. Notional alone would rank the third trade as smaller; heat correctly shows that it consumes more of the loss budget.

Margin utilization answers another question: how much collateral capacity is committed? Heat, gross exposure, and utilization describe loss budget, market footprint, and account pressure respectively. Treating them as substitutes creates blind spots.

How do correlation and concentration raise effective heat?

Simple heat assumes every planned loss is additive, which is conservative when trades are independent. In crypto, positions often share the same driver. BTC, ETH, and several altcoins can fall together during risk-off moves. Stops may cluster and execute into the same shrinking liquidity.

One practical approach is to calculate base heat, then label correlated groups. If three positions contribute 1% each and all express the same “crypto beta long” idea, do not call them diversified. Their group heat is 3%, and a stress buffer may be appropriate for simultaneous slippage.

Concentration also matters within a symbol. Three BTC entries with different labels are still one BTC exposure. Aggregate their risk before deciding whether a new trade fits the budget. Strategy names do not create diversification.

Apply this to your account: Calculate my portfolio heat. DRKN can help structure position size, stop distance, account equity, and alert conditions into an educational review. It does not place orders, custody assets, or guarantee that a stop will fill at its trigger price.

What makes a stop usable in the calculation?

A usable stop has a defined trigger, expected order behavior, and a reason connected to the trade scenario. “I will close if it looks bad” cannot produce a reliable heat number. A stop exactly at liquidation is also not a risk plan: liquidation includes venue rules and may occur before a discretionary response.

Review whether the stop is mark-price or last-price triggered, whether it becomes a market or limit order, and whether reduce-only behavior is available. A stop-limit order can avoid an unacceptable fill but may remain unfilled. A stop-market order prioritizes exit but can slip. Portfolio heat should therefore include an estimated execution buffer based on liquidity and volatility.

If no credible stop exists, label the position “undefined risk” rather than entering zero. Unknown is an important account state. It should block the false conclusion that more risk capacity is available.

How can a trader set a heat limit?

There is no universal safe percentage. A sensible limit depends on strategy frequency, stop reliability, leverage, collateral, volatility, and tolerance for a cluster of losses. Work backward from a maximum acceptable drawdown and a realistic losing streak rather than copying another trader's number.

Suppose the account should not lose more than 8% across four simultaneous stopped trades. An initial planning ceiling might allocate 2% per independent idea, then lower allocations for correlated positions or weak liquidity. This is an operating hypothesis to test, not a recommendation.

Define two boundaries: a normal heat budget and a hard “no new exposure” level. Also decide how heat is freed. It should decrease when size is reduced, stops move legitimately, or positions close—not because a stop was deleted.

A repeatable portfolio heat review

List account equity and every live position. For each, record quantity, entry, stop, estimated fees, and slippage buffer. Calculate risk in the same currency and sum it. Group positions by symbol and shared market driver. Add a second scenario that includes pending orders.

Compare base heat, correlated-group heat, and potential heat with personal limits. Then inspect margin utilization and liquidation distance to find risks the stop model misses. Create alerts when heat crosses a limit or jumps after a new fill.

DRKN can make this review easier by translating raw account and position values into consistent risk questions and timely attention points. It remains an educational decision aid: exchange data must be verified and execution stays with the user.

Pair portfolio heat with gross vs net exposure and single-symbol concentration risk for the full risk picture, then confirm margin headroom with margin utilization ratio in crypto futures.

Frequently asked questions

Is portfolio heat the same as drawdown?

No. Heat is a forward-looking estimate based on current stops; drawdown is a realized or marked decline from a previous equity peak.

Should unrealized profit increase account equity in the formula?

Using current equity reflects present capacity but can make the budget expand during an open winner. A conservative policy may use the lower of starting and current equity.

What if a position has no stop?

Classify its risk as undefined and review it separately. Assigning zero would understate heat.

Do hedged positions reduce heat?

Only when the hedge relationship, size, venue, and execution behavior are credible. Calculate each leg first and stress the possibility that one leg fails.

Sources

• CME Group: Managing risk with futures
• CFTC: Basics of futures trading
• Coinbase: Futures liquidation

Risk disclaimer: This is educational content, not financial advice. Stops may execute at worse prices than expected, and leveraged futures can cause rapid losses or liquidation.