Portfolio Heat: will it save your bacon?

[willoneau]

I did read some were that a % of heat has to be added to positions above BE to allow for some risk or you could get the scenario of unlimited positions.

 

[willoneau]

30 positions no stop 100% portfolio heat.
Add a trailing stop and heat is reduced.
I think the question is do you consider open profits as yours or only closed positions in bank?

 

[Zaxon]

Why does portfolio heat ignore if a position is in profit?
What is it measuring?
If all your positions are in profit and your trailing stop is above your entry price what is your portfolio heat?
are you including paper profits as capital also at risk?

Should the market crash tomorrow and all your positions be stopped out, there's two separate things you'd want to know.
1) How much outright loss from my current value would I endure?
2) Of my positions which aren't a guaranteed profit (stop < buy-in price), how much would I lose?

Most people call 1) portfolio heat. We're calling 2) capital at risk.

 

[willoneau]

Unfortunately black swans carn't be managed.

 

[Zaxon]

I did read some were that a % of heat has to be added to positions above BE to allow for some risk or you could get the scenario of unlimited positions.

You will. There's several ways people are using the term "Portfolio heat". That's why I specifically started this thread, to try and hash out a consensus on exactly what they mean. The definitions that have arisen from this thread is that portfolio heat doesn't factor in BEs. Capital at Risk does. But don't be surprised if you see different people using them, but be meaning different things.

 

[Zaxon]

30 positions no stop 100% portfolio heat.
Add a trailing stop and heat is reduced.

That's correct.

I think the question is do you consider open profits as yours or only closed positions in bank?

For sure. That's why we've come up with two separate terms, and given them specific meanings. One factors in profits, the other doesn't.

 

[Zaxon]

Unfortunately black swans carn't be managed.

Yup. Stops are a best case, loss minimization scenario. They can always be gapped or blown through. That's why you need to be not too generous in setting your risk levels. Because the reality can have slippage and missed stops.

 

[willoneau]

Yup. Stops are a best case, loss minimization scenario. They can always be gapped or blown through. That's why you need to be not too generous in setting your risk levels. Because the reality can have slippage and missed stops.

Not sure what your implying here?

 

[willoneau]

I think you have decide as an individual if open profits are real or not same as open losses.

 

[Zaxon]

Not sure what your implying here?

A few days ago, the market went through a rapid drop. I had stop-losses in place, a number of them fired as Limit Orders, but the shares didn't sell because the current share prices just fell right past them. I was forced to manually go on and sell them at a price below my original stops.



Common wisdom is that shouldn't risk more than 1-2% of your portfolio. Let's say that you, personally, are comfortable with 2%. But because we know that stops aren't guaranteed, I'd say set your stops at 1% (or maybe 1.5%).

 

[willoneau]

A few days ago, the market went through a rapid drop. I had stop-losses in place, a number of them fired as Limit Orders, but the shares didn't sell because the current share prices just fell right past them. I was forced to manually go on and sell them at a price below my original stops.

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Common wisdom is that shouldn't risk more than 1-2% of your portfolio. Let's say that you, personally, are comfortable with 2%. But because we know that stops aren't guaranteed, I'd say set your stops at 1% (or maybe 1.5%).

I also had a number of stocks that went below my trailing stops but because I only put sell orders in when price closes below my stops on Friday I still have those positions.

 

[Zaxon]

I think you have decide as an individual if open profits are real or not same as open losses.

And I think that comes down to your trading length. If you're a short term trader, then you probably always reference back to the amount of money you put in the market originally. "I've opened 5 positions it cost me $50k, I want to know my risk relative to that." But if you're an investor (or longer term trader), then you probably think of losses relative to your current portfolio's value. "I put $50k in the market, I've held it for a few years and it's now $100k. I want to protect that wealth".

 

[willoneau]

Not sure what your getting at here?
that comment was in reference to portfolio heat calculations.

 

[willoneau]

Take SRG I hold at moment my stop is at 0.465, that is a close below that on Friday will force me to close position.

 

[Zaxon]

Not sure what your getting at here?

Which part don't you understand?

 

[willoneau]

And I think that comes down to your trading length. If you're a short term trader, then you probably always reference back to the amount of money you put in the market originally. "I've opened 5 positions it cost me $50k, I want to know my risk relative to that." But if you're an investor (or longer term trader), then you probably think of losses relative to your current portfolio's value. "I put $50k in the market, I've held it for a few years and it's now $100k. I want to protect that wealth".

are you saying you put in $50,000 and you have $50,000 in open profits?

 

[willoneau]

Which part don't you understand?

sorry I edited it to give more information while you were replying.

 

[Zaxon]

are you saying you put in $50,000 and you have $50,000 in open profits?

Correct in scenario 2. Scenario 1, the open profit wasn't mentioned, but presumably was much smaller.

 

[willoneau]

How is trading length referenced to portfolio heat?

 

[willoneau]

5 positions 50k cost , risk is distance of stop.
Now is that the portfolio heat?