Portfolio Heat: Risk Management Tactics

Portfolio heat is simply the maximum total exposure that you want to risk at any given time across your entire portfolio. It is a form of risk management.

Commodity traders trading large accounts, over 250k, will limit their portfolio heat to usually no more than 20 – 25% of their account equity. For smaller accounts, under 250k, you need to limit your total number of positions.

For example, visualize your account as a parking lot, and your trades as the cars in the lot. If there are 10 spaces in the lot, then obviously only 10 cars may park in it. In order for a new car to park, first, one must leave. You do this to protect yourself against those rare events that end up not being so rare and seem to occur at the worst possible time.

By limiting your total exposure or portfolio heat you are arbitrarily quantifying how bad you can get hurt if all of the positions in your account go against you to your stops. This of course would not be pleasant, but by limiting your total exposure it will also not bankrupt you.

Today, modern technology has made it much easier for small size traders (accounts less than 250k) to manage their risks using highly advanced risk management methods and techniques that were in the past only available to extremely high net wealth traders.

Commodity Trading Solutions offers strategies that will manage the portfolio heat as well as many additional risk management metrics for your account.

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