Portfolio heat: add the risk of open positions

Planned loss and total exposure

For a simple long share position, planned loss equals quantity multiplied by the distance from the current reference price to the protective exit. Use the same reference convention throughout: risk measured from original entry differs from the possible decline in current equity. Add estimated execution costs separately.

Heat differs from gross exposure, which adds position market values. Several large holdings with nearby exits can show little planned heat but substantial gap exposure. Nor is heat a probability calculation: summing planned losses says nothing about the likelihood that the exits will occur together.

Worked example: 2.05% becomes 3.65%

Suppose fictional account equity is $40,000. Position A has 100 shares at a $50 reference price and a planned exit at $47: $300 at risk. Position B has 80 shares at $75 with an exit at $71: $320. Position C has 200 shares at $20 with an exit at $19: $200.

Total planned loss is $820, or 2.05% of equity. If an overnight event instead produces exits at $45, $68 and $18, losses become $500 + $560 + $400 = $1,460, or 3.65%, before fees. The second calculation explains why a written heat limit needs an additional gap scenario.

Correlation and gaps can break the estimate

Three companies in one sector may react to the same news, so their separate charts do not necessarily diversify the account. Do not subtract an assumed hedge without examining its failure conditions. Short positions, derivatives, changing multipliers and currency movements require additional calculations beyond the simple share example.

Inspect shared invalidation zones

On available closed daily, weekly or monthly charts, check whether proposed invalidation levels sit behind the same market-wide support zone. Note historical gaps through similar levels and dates when the instruments moved together. Use Student Wyckoff Pro for this closed-bar context, then maintain the hypothetical risk table separately from the chart analysis.

Primary sources

Sources explain the mechanics and limitations; the editorial examples use invented numbers rather than market quotations.

• The 2% Rule
• Stop Orders: Factors to Consider During Volatile Markets

Sources checked: 2026-10-23