Portfolio Heat: will it save your bacon?

[willoneau]

I believe portfolio heat is not relevant with fixed fractional risk management.

 

[Zaxon]

How is trading length referenced to portfolio heat?
5 positions 50k cost , risk is distance of stop.
Now is that the portfolio heat?

Portfolio heat is defined the same in both short and long trading styles. The difference is how they see Capital at Risk.

 

[Zaxon]

I believe portfolio heat is not relevant with fixed fractional risk management.

To some extent that's correct. It's capital at risk that matters most. But some people also place an upper limit on portfolio heat.

 

[willoneau]

Totally agree, Capital at risk is either with open positions value or not.

 

[willoneau]

To some extent that's correct. It's capital at risk that matters most. But some people also place an upper limit on portfolio heat.

I would say those that probably don't use fixed fractional risk.

 

[willoneau]

% Capital risk would, also very relevant if that % risk varied between positions.
I would be watching portfolio heat if I was scaling in.

 

[willoneau]

I believe portfolio heat only has relevance if you use open position Capital Valuation to determine your next entry size, IMHO.

 

[Newt]

"profit adjust for open risk" - can you explain what you mean here? And what percentage portfolio heat do you allow in your portfolio?

Agreed. It's very easy to give those profits back. And the market doesn't even have to go down. If it goes sideways for a while, and the market is volatile enough, you can get whipsawed out.

Weekly, OK. What's your average holding period?

Hi Zaxon,
Re-reading Pete's posts, what I'm calling Open Profit-Open risk sounds like what he's calling Portfolio heat (open profits/loss versus current trailing stop).

I try to focus on profit/loss of my trailing stop values rather then get excited if open profit suddenly spikes - its a psychology thing. Its not currently an integral part of my system.

Average holding period is just under 6 months for winners. I'm fussy about entry criteria and prefer to hold on for long term trends rather than jumping in and out a lot. There are tax benefits too if you can't get a nice profit held >12 months. Once the trend has clearly failed, I'm out though.