Concept
Max Heat
Max Heat, also known as portfolio heat caps, is a Risk, Sizing & Exits concept. First implementations are in the build queue: the write-up leads, the indicators follow.
What is Max Heat?
Max heat is a portfolio-level risk cap: the maximum total amount, expressed as a percentage of equity, that all open positions together are allowed to lose if every stop is hit at once. "Heat" is the running total of open risk; the max-heat rule, also called a portfolio heat cap, refuses new positions (or forces size reductions) whenever adding them would push that total past the ceiling. The term is common in trend-following practice, where systems routinely hold many concurrent positions.
The rule exists because per-trade sizing is not enough. A trader risking a disciplined 1 percent per trade via fixed-fractional sizing can still carry ten open positions and be exposed to a 10 percent single-day loss if they resolve together, which correlated markets often make likely. Max heat converts many individually reasonable decisions into one bounded portfolio statement: this is the most the book can lose from here on stops.
Traders care because portfolio heat is what actually produces drawdowns. Losing streaks rarely arrive one trade at a time; they arrive as regime shifts that hit related positions simultaneously. A heat cap does not predict that event, it simply prices it in advance and keeps the worst case survivable.
How it's calculated
Heat is the sum of open risks; the rule is a ceiling on that sum:
Some implementations measure risk from entry rather than current price, which ignores the risk reduction from trailed stops; measuring from current stops is the more informative form.
Gaps and slippage mean realized loss can exceed computed heat; the cap bounds the stop-based estimate, not the true worst case.
How traders use it
- As an admission gate: before any new entry, the trader computes what portfolio heat would be with the new position included and skips or downsizes the trade if it breaches the cap, regardless of how attractive the setup is.
- Layered with correlation limits: many desks run a total heat cap plus tighter sub-caps per sector, currency, or theme, since correlation makes nominally separate positions behave as one large one.
- As a de facto throttle in drawdowns: trailed stops on winners release heat while fresh losses consume the budget, so the rule naturally slows new risk-taking when the book is struggling, similar in effect to equity-curve throttling.
- In prop and funded-account contexts, heat caps are sized against the account's daily and overall loss limits so that a simultaneous stop-out cannot breach the firm's rules.
- With honest limits: heat measures stop-based risk only. It says nothing about gap risk past stops, liquidity in a crash, or positions without hard stops, and it should be read alongside drawdown statistics rather than as a complete risk model.
Max heat vs related portfolio risk controls
Fixed Fractional: Sizes each trade in isolation. Max heat is the aggregation layer on top: it constrains how many fixed-fractional bets may be open at once.
Portfolio-Aware Sizing: Goes further than a cap by shaping each position's size using correlations and existing exposures. Max heat is the blunter, simpler backstop that works without a covariance estimate.
Loss Control Rules: React to realized losses (daily stops, streak rules). Max heat is prospective: it bounds potential loss before it is realized.
Related concepts · Position sizing
Concept family
Risk, Sizing & Exits
37 concepts mapped · 37 in the Library
Max Heat FAQ
What is a reasonable max heat number?
There is no single standard. Trend followers with diversified books often run mid-single-digit to low-double-digit percentages; concentrated or correlated books warrant less. The honest procedure is to choose the drawdown you can tolerate from one simultaneous stop-out and work backwards.
Is heat measured from entry or from the current stop?
Both conventions exist. Measuring from current stops reflects reality better, since trailed stops on winners genuinely reduce open risk; measuring from entry overstates heat on managed positions.
Does a heat cap protect against gaps?
No. It bounds the loss if stops execute at their levels. Gaps, halts, and slippage can push realized losses past the cap, which is a reason to set it below the true pain threshold.
What do I do when a great setup would breach the cap?
Skip it, take it at reduced size, or close or tighten something else to free heat. Making an exception is how the cap stops being a cap.
Build Max Heat your way.
Quant writes, tests, and refines it with you — then it runs on LuxAlgo charting or ports to TradingView.