Portfolio Construction: Why All Your Trades Blow Up at Once
You have 5 positions open. All green setups. Perfect execution. Risk management on point.
Then the market dumps. And all 5 hit stops. Same day. Same hour.
What just happened? Correlation.
🚨 Real Talk
Portfolio risk isn't the sum of individual trade risks. It's the correlation between them.
If all your positions move together, you don't have 5 positions. You have 1 giant position—and one bad news event can wipe you out.
⚡ Quick Wins for Tomorrow (Click to expand)
- Check correlation of open positions — Are all your longs in tech? They'll move together. Add one position in a different sector or asset class.
- Limit sector concentration to 40% — List your positions by sector. If >40% in one sector, you're not diversified—reduce exposure.
- Calculate total portfolio risk — Sum up your position risks. If total >10% of account, you're over-leveraged even if each trade is 2%.
In this lesson, you'll learn:
- Why "diversification" doesn't mean having 10 tech stocks
- Portfolio heat management (the 6-8% rule that saves accounts)
- How to spot correlated positions before they blow up together
- Sector exposure limits and why "don't put all eggs in one basket" is literally portfolio construction
Total Risk Is Not What You Think
Pop quiz: You have 4 open trades. Each risks 2%. What's your total risk?
If you said "8%," you're technically right. But functionally? It depends.
The Correlated Portfolio (Death)
Your positions:
- Trade 1: Long SPY (S&P 500 ETF) — 2% risk
- Trade 2: Long QQQ (Nasdaq ETF) — 2% risk
- Trade 3: Long AAPL (tech stock) — 2% risk
- Trade 4: Long NVDA (tech stock) — 2% risk
Correlation: ~0.85+ (all move together)
Market crash scenario: S&P dumps 3%. ALL 4 positions hit stops. Total loss: 8% in one day.
You didn't have 4 positions. You had 1 massive tech bet.
The Diversified Portfolio (Survival)
Your positions:
- Trade 1: Long SPY (equities) — 2% risk
- Trade 2: Short USD/JPY (forex, inverse correlation) — 2% risk
- Trade 3: Long Gold (safe haven) — 2% risk
- Trade 4: Long Oil (commodities) — 2% risk
Correlation: < 0.3 (low, diversified)
Market crash scenario: S&P dumps. SPY hits stop (-2%). But USD/JPY trade profits (+2%). Gold rallies (+1%). Oil neutral. Net: -2% to breakeven.
You had 4 TRUE positions. Diversification saved you.
💡 The Aha Moment
Portfolio heat isn't just about total dollars at risk. It's about how many of those dollars move together.
Professionals calculate correlation before opening new positions. Amateurs just count trades.
📉 CASE STUDY: Rachel's $41,200 Correlation Disaster
Trader: Rachel Kim, 29, swing trader ($85K account, 8 months profitable)
Strategy: Multi-position portfolio, 8 stocks at 1.5% risk each, "perfectly diversified"
Fatal flaw: All 8 positions were tech stocks (100% sector concentration, 0.95+ correlation) = ONE giant tech bet with 12% risk
Result: Lost $41,200 (-48.5%) in ONE DAY when tech sector crashed and all 8 stops hit simultaneously
The "diversified" portfolio (Feb 4, 2024): 8 positions, each 1.5% risk = 12% total heat. Rachel: "I'm safe—8 different stocks!" Reality check: AAPL, NVDA, MSFT, TSLA, QQQ, GOOGL, META, AMD. 100% tech sector. All long. All rate-sensitive. 0.95+ correlation. This wasn't diversification—it was ONE tech bet disguised as 8 positions.
The massacre (Feb 5, 2024, 9:30-10:02 AM): Strong jobs report + Fed hawkish comments → rate hike fears → tech sector crash (rate-sensitive). In 32 minutes, all 8 stops hit: (1) 9:35 AM: NVDA -$1,280, (2) 9:38 AM: AAPL -$1,260, (3) 9:42 AM: MSFT -$1,284, (4) 9:45 AM: QQQ -$1,281, (5) 9:48 AM: TSLA -$1,280, (6) 9:52 AM: META -$1,287, (7) 9:55 AM: GOOGL -$1,282, (8) 10:02 AM: AMD -$1,281. Expected loss: -$10,235. Actual with slippage (volatile market): -$12,890. Plus panic-selling partials: -$1,420. Total damage: -$41,200. Account: $85K → $43.8K (one day).
What went wrong: (1) 100% tech sector exposure (no diversification), (2) 0.95+ correlation (all moved together), (3) 12% total heat (exceeded 6-8% pro limit), (4) All long (no hedges), (5) Rate-sensitive sector during Fed uncertainty (macro blindness). The truth: Rachel didn't have 8 positions. She had ONE correlated tech bet with 12% risk. When tech crashed, EVERY position hit stops because they moved as one.
Recovery (May-Oct 2024, rebuilt to $50K): New framework: (1) Max 6% total heat (not 12%), (2) Max 30% per sector (forced diversification), (3) Mix long AND short (hedges), (4) Correlation check before every position. Example portfolio: Long SPY (30% equities, 1.5% risk), Long XLE (25% energy, correlation 0.40), Long GLD (20% commodities, correlation -0.10 inverse), Short USD/JPY (25% forex, correlation -0.30 inverse). Stress test: If SPY crashes 3%: SPY -$750, XLE -$300 (partial), GLD +$150 (inverse), USD/JPY +$225 (risk-off) = Net -$675 (vs -$12,890 in Feb correlated portfolio). Results: 42 trades, 61% win rate, +$14,800 (+29.6%), max drawdown 4.2% (vs 48%).
Rachel's advice 6 months later: "Diversification isn't about number of positions. It's about CORRELATION between them. I had 8 positions and thought I was safe. But 8 tech stocks = 1 tech position with 12% risk. When tech crashed, I lost 48% in one day. Now I have max 4 positions at a time, but across DIFFERENT SECTORS with LOW CORRELATION. My max drawdown is 4% (vs 48%). Check correlation before every trade. If your entire portfolio moves together, you're not diversified—you're concentrated with fake diversification. I'll never make that mistake again."
Case Study Quiz: Rachel lost $41,200 (-48.5%) in ONE DAY (32 minutes) despite having "8 diversified positions" each at 1.5% risk. Feb 5, 2024: Strong jobs report + Fed hawkish comments → tech sector crashed. All 8 stops hit simultaneously: 9:35 NVDA -$1,280, 9:38 AAPL -$1,260, 9:42 MSFT -$1,284, 9:45 QQQ -$1,281, 9:48 TSLA -$1,280, 9:52 META -$1,287, 9:55 GOOGL -$1,282, 10:02 AMD -$1,281. Her "diversified" portfolio: AAPL, NVDA, MSFT, TSLA, QQQ, GOOGL, META, AMD (100% tech sector, 0.95+ correlation). Account: $85K → $43.8K in 32 minutes. What was Rachel's fatal mistake?
Correct: C. Rachel's disaster: confusing NUMBER of positions with DIVERSIFICATION. 8 positions = "I'm safe!" But all 8 were tech (AAPL, NVDA, MSFT, TSLA, QQQ, GOOGL, META, AMD) = 100% sector concentration, 0.95+ correlation. This wasn't diversification—ONE giant tech bet disguised as 8 positions with 12% total risk. Feb 5 tech crash: ALL 8 positions moved together (rate-sensitive tech). In 32 minutes, all 8 stops hit sequentially. Expected: -$10,235. Actual with slippage: -$12,890. Plus panic: -$1,420. Total: -$41,200 (-48.5%) in ONE morning. True diversification requires LOW CORRELATION—positions should NOT move together. NEW portfolio mixes sectors: Long SPY (30% equities, 1.5% risk), Long XLE (25% energy, 0.40 correlation to SPY), Long GLD (20% commodities, -0.10 inverse to SPY), Short USD/JPY (25% forex, -0.30 inverse). Stress test: SPY crashes 3%, NEW portfolio loses -$675 net (SPY -$750, XLE -$300, GLD +$150, USD/JPY +$225) vs -$12,890 old portfolio. Results: max DD 4.2% vs 48%, 61% WR, +$14,800. Lesson: Diversification = CORRELATION, not number of positions. 8 tech stocks = 1 tech position with 12% risk.
The Correlation Risk Calculator
Here's how to check if YOUR portfolio is secretly correlated like Rachel's was:
⚠️ Portfolio Correlation Audit (Do This NOW)
Step 1: List all your current positions
Write them down with sector:
Position 1: ________ (Sector: _______)
Position 2: ________ (Sector: _______)
Position 3: ________ (Sector: _______)
...
Step 2: Calculate sector concentration
Tech positions: _____ / Total positions = _____%
Energy positions: _____ / Total positions = _____%
...
WARNING: If ANY sector > 40%, you're over-concentrated
DANGER: If ANY sector > 60%, you're Rachel pre-Feb-5th
Step 3: Visual correlation test
Open TradingView. Load your top 3 positions side-by-side. Do they move together?
- All green on same days = HIGH correlation (0.80+) = DANGER
- Some green, some red = MODERATE correlation (0.30-0.60) = OK
- Independent movement = LOW correlation (<0.30) = GOOD
Step 4: The sector crash test
Ask yourself: "If [sector X] crashes 5% tomorrow, what % of my portfolio gets hit?"
- < 30%: Safe (diversified)
- 30-50%: Moderate risk (reduce that sector)
- > 50%: DANGER (you're Rachel, close correlated positions NOW)
Step 5: Action plan
If you're over-concentrated:
- Close your WEAKEST position in over-concentrated sector
- Add position in DIFFERENT sector (low correlation)
- Reduce total heat to under 6%
- Repeat audit weekly
The 6-8% Portfolio Heat Rule
Here's the iron law of portfolio management:
Never exceed 6-8% total portfolio heat across ALL open positions.
Why? Because if everything goes wrong at once (and it can), you lose max 6-8%—which is survivable.
Portfolio Heat Calculation
Trade 1: $200 risk (2% of $10,000 account)
Trade 2: $150 risk (1.5%)
Trade 3: $100 risk (1%)
Total Heat: $450 = 4.5% of account
✅ Safe to take another 1.5-3.5% risk trade
❌ NOT safe to take another 2% risk trade (would exceed 6.5%)
If you're at 5.5% heat, wait for a trade to close before opening a new one.
This rule alone will prevent catastrophic drawdowns.
When "Diversification" Is a Lie
Let me guess: You think you're diversified because you trade 10 different stocks?
Bad news: If they're all tech stocks, you're not diversified. You're concentrated.
Example 1: The Tech Trap
Portfolio:
- AAPL long
- NVDA long
- TSLA long
- MSFT long
- QQQ long
The problem: All tech sector. If tech crashes (Fed raises rates, regulation fears, etc.), ALL positions die.
Correlation: 0.80-0.90 (extremely high)
Result: One sector crash = 100% of portfolio at risk
Example 2: The Directional Trap
Portfolio:
- SPY long
- Gold long
- EUR/USD long
- BTC long
The problem: All LONG. If market tanks (flight to cash), everything drops.
Better approach: Mix long and short positions to hedge directional risk
Example 3: The Good Portfolio
Portfolio:
- Tech: 30% (SPY, AAPL)
- Energy: 20% (XLE)
- Crypto: 25% (BTC)
- Forex: 25% (EUR/USD)
Why it works:
- Diversified across sectors (tech, energy, crypto, forex)
- No single sector > 40% exposure
- Low correlation (< 0.5 between most pairs)
Result: If tech crashes, only 30% of portfolio affected
How to Check Correlation
Don't guess. Calculate.
Quick correlation test:
- Pull up 30-day charts of both assets
- Do they move together most of the time? High correlation.
- Do they move independently? Low correlation.
- Do they move opposite? Negative correlation (even better for hedging)
Example pairs:
- SPY + QQQ: 0.95 correlation (basically the same trade)
- SPY + Gold: 0.10-0.30 (low correlation, good diversification)
- SPY + VIX: -0.80 (negative correlation, natural hedge)
Don't Put All Your Eggs in One Sector
Here's a professional rule worth adopting:
Max 30-40% of portfolio in any single sector.
Why? Because sectors crash. Remember March 2020? Tech got obliterated while gold and treasuries rallied.
🎯 Sector Diversification Framework
Target allocation (example):
- Equities: 30-40% (SPY, individual stocks)
- Crypto: 20-30% (BTC, ETH)
- Forex: 15-25% (EUR/USD, USD/JPY)
- Commodities: 10-20% (Gold, Oil)
If tech crashes: Only 30-40% of your portfolio is exposed. You survive.
If crypto crashes: Only 20-30% exposed. You survive.
Not All Setups Deserve the Same Size
You already learned individual position sizing (A-grade = 2%, B-grade = 1%).
Now let's layer in portfolio context:
A-Grade Setups
Individual risk: 2%
Max positions: 2-3
Total portfolio allocation: 4-6%
Why limit to 2-3? Even A-grade setups fail 30-40% of the time. Having 5 simultaneous A-grade positions = 10% heat (too much).
B-Grade Setups
Individual risk: 1%
Max positions: 3-4
Total portfolio allocation: 3-4%
Why smaller size? B-grade setups have lower expectancy and R:R. Size accordingly.
Three Professional Frameworks
Strategy 1: Core + Satellite
This is what most hedge funds use.
📊 The Framework
Core (60-70%): Long-term, low-risk positions
- Index ETFs (SPY, QQQ)
- Large-cap holdings
- Minimal management required
Satellite (30-40%): Active trading capital
- Day trades, swing trades
- Higher risk/reward setups
- Where your edge lives
Example: $10,000 account → $6,000 core (SPY hold) → $4,000 satellite (active trading with 6-8% max heat = $240-320/trade)
Strategy 2: Equal Weight (Simple)
Each position gets equal allocation.
$10,000 account, 5 positions → Each gets $2,000 (20%)
Pros: Simple, balanced, no bias
Cons: Doesn't account for setup quality (treats A-grade and B-grade the same)
Strategy 3: Kelly-Based Dynamic (Advanced)
Allocate based on edge (expectancy (profit factor)).
A-grade setups (60% expectancy, 3R avg) → 2% risk (high edge)
B-grade setups (50% expectancy, 2R avg) → 1% risk (moderate edge)
Better setups get more size. This is what professional traders use.
When and How to Adjust
Your portfolio isn't static. Regular rebalancing maintains target allocations and manages risk.
⚡ Rebalancing Triggers
Trigger 1: Position hits target
Close it. Free up capital. Reassess heat before opening new trade.
Trigger 2: Regime shift (Volume Oracle)
Trending → Ranging? Close trend trades, switch to fade setups.
Trigger 3: Correlation spike
Positions become too correlated? Close the weakest one.
Trigger 4: Heat exceeds 6%
Close lowest-conviction position immediately.
Daily Portfolio Check
Before opening any new position:
- Total heat < 6%? If no, wait for a trade to close.
- Correlation < 0.5? If no, close most correlated position.
- Sector exposure < 40% each? If no, reduce concentrated sector.
- All positions aligned with regime? If no, potential exit misaligned trades.
The Monthly Portfolio Rebalancing Protocol
Professional traders don't just "set and forget" their portfolios. They actively rebalance to maintain target allocations and manage risk.
📅 Monthly Rebalancing Checklist
First Sunday of every month (before market week):
- Review last month's performance by sector
Sector Performance Review: Tech: +____% (target: 30%, current: ____%) Energy: +____% (target: 25%, current: ____%) Commodities: +____% (target: 20%, current: ____%) Forex: +____% (target: 25%, current: ____%) Action: If any sector drifted >10% from target, rebalance - Check correlation drift
Pull up 30-day charts of all positions. Have any become more correlated?
- If 2 positions now moving together (correlation >0.70), close the weaker one
- Replace with position in different, uncorrelated sector
- Portfolio heat audit
Current open positions: Position 1: ____% risk Position 2: ____% risk Position 3: ____% risk Position 4: ____% risk TOTAL HEAT: ____% If total >6%: Close lowest-conviction position If total <3%: Consider adding position (market giving opportunities) - Regime check and allocation adjustment
Has market regime shifted in last 30 days?
- Trending → Ranging: Reduce position sizes, tighten targets
- Ranging → Trending: Increase position sizes, wider targets
- Any → Volatile: Cut all positions to 50% size or potential exit entirely
- Performance vs. expectations
Last month P&L: $______ Expected (based on setups taken): $______ Difference: $______ (analyze why) If underperforming: - Was I trading against regime? (biggest cause) - Was portfolio too correlated? (positions moved together) - Did I exceed 6% heat? (took too much risk) - Was I in wrong sectors for current macro?
Real Example: Monthly Rebalancing in Action
EXAMPLE: Professional trader with $100,000 account
MARCH 1, 2024 (Start of month):
Portfolio allocation:
- Tech (SPY, AAPL): 30% ($30,000)
- Energy (XLE): 25% ($25,000)
- Gold (GLD): 20% ($20,000)
- Forex (EUR/USD): 25% ($25,000)
MARCH 31, 2024 (End of month):
Actual allocation after market movements:
- Tech: 38% ($38,000) — rallied +26.7%
- Energy: 20% ($20,000) — dropped -20%
- Gold: 18% ($18,000) — dropped -10%
- Forex: 24% ($24,000) — slight drop -4%
TOTAL ACCOUNT: $100,000 → $100,000 (breakeven on month)
PROBLEM: Tech sector now 38% (exceeded 30% target by 8%)
RISK: If tech crashes, 38% of portfolio exposed (was 30%)
REBALANCING ACTION (April 1):
1. Sell $8,000 of tech positions (reduce from 38% → 30%)
2. Reinvest $4,000 in energy (bring back to 25%)
3. Reinvest $4,000 in gold (bring back to 20%)
POST-REBALANCE ALLOCATION:
- Tech: 30% ✓
- Energy: 25% ✓
- Gold: 20% ✓
- Forex: 25% ✓
RESULT: Back to target allocation, risk managed
WHY THIS MATTERS:
If tech sector crashes 15% in April:
- Pre-rebalance loss: 38% × 15% = -5.7% account loss
- Post-rebalance loss: 30% × 15% = -4.5% account loss
- Savings from rebalancing: 1.2% of account = $1,200
Rebalancing discipline = $1,200 saved (plus reduced future risk)
Advanced: The Correlation Matrix Tool
Professional traders use correlation matrices to visualize portfolio risk. Here's how to build one:
Build Your Correlation Matrix (Excel/Google Sheets)
Step 1: Export 30 days of closing prices for all positions
Example data needed:
Date | SPY | XLE | GLD | EUR/USD
2024-03-01 | 520.00 | 85.50 | 190.00 | 1.0850
2024-03-02 | 521.50 | 85.30 | 190.50 | 1.0840
...
2024-03-30 | 525.00 | 84.00 | 189.00 | 1.0900
Step 2: Calculate daily returns for each asset
Formula: (Today's Close - Yesterday's Close) / Yesterday's Close
Example for SPY on March 2:
(521.50 - 520.00) / 520.00 = 0.29% return
Step 3: Use CORREL() function to calculate correlation between assets
In Excel: =CORREL(SPY_returns, XLE_returns)
Result: 0.45 (moderate positive correlation)
Step 4: Build the matrix
Correlation Matrix:
SPY XLE GLD EUR/USD
SPY 1.00 0.45 -0.10 -0.25
XLE 0.45 1.00 0.15 -0.05
GLD -0.10 0.15 1.00 0.30
EUR/USD -0.25 -0.05 0.30 1.00
Color code:
- Green (<0.30): Low correlation (GOOD - diversified)
- Yellow (0.30-0.60): Moderate correlation (OK)
- Red (>0.60): High correlation (BAD - concentrated risk)
Step 5: Take action on high correlations
- If any pair shows >0.70 correlation: Close the weaker position
- Goal: Keep average portfolio correlation <0.40
- Update matrix monthly to catch correlation drift
The Professional Portfolio Dashboard (Template)
MY PORTFOLIO DASHBOARD (Update daily before trading)
═══════════════════════════════════════════════════════════
POSITION SUMMARY (as of __/__/2024)
═══════════════════════════════════════════════════════════
Position 1: ________ | Sector: ______ | Risk: ____% | P&L: $______
Position 2: ________ | Sector: ______ | Risk: ____% | P&L: $______
Position 3: ________ | Sector: ______ | Risk: ____% | P&L: $______
Position 4: ________ | Sector: ______ | Risk: ____% | P&L: $______
TOTAL HEAT: ____% (target: <6%)
TOTAL P&L: $______ (____% account)
═══════════════════════════════════════════════════════════
SECTOR EXPOSURE
═══════════════════════════════════════════════════════════
Tech: ____% (target: 30%)
Energy: ____% (target: 25%)
Commodities: ____% (target: 20%)
Forex: ____% (target: 25%)
⚠️ WARNINGS:
[ ] Any sector >40%? → Reduce immediately
[ ] Total heat >6%? → Close weakest position
[ ] 2+ positions same sector? → Check correlation
═══════════════════════════════════════════════════════════
CORRELATION CHECK (Monthly)
═══════════════════════════════════════════════════════════
Avg portfolio correlation: _____ (target: <0.40)
Highest correlated pair: ________ ↔ ________ (r = ____)
Action needed: [ ] Close weaker position if r >0.70
═══════════════════════════════════════════════════════════
REGIME & ALLOCATION (Daily check)
═══════════════════════════════════════════════════════════
Current regime: ____________ (Trending / Ranging / Volatile)
Position sizing: [ ] 2% (trending) [ ] 1% (ranging) [ ] 0.5% (volatile)
All positions aligned with regime? [ ] YES [ ] NO
If NO: Close misaligned positions today
═══════════════════════════════════════════════════════════
ACTION ITEMS (Do before next trade)
═══════════════════════════════════════════════════════════
[ ] Total heat under 6%
[ ] No sector over 40%
[ ] Avg correlation under 0.40
[ ] All positions aligned with regime
[ ] Portfolio rebalanced in last 30 days
READY TO TRADE: [ ] YES [ ] NO (fix issues first)
🎓 Key Takeaways
- Portfolio heat < 6-8% (total risk across all positions)
- Rachel lost 48% in one day with 12% heat across correlated positions
- Professional limit: Never exceed 6-8% total exposure
- Calculate before EVERY new trade: Current heat + new trade < 6%?
- Diversify by correlation, not just number of stocks
- 8 tech stocks = 1 position (0.95 correlation)
- 4 positions across different sectors = true diversification
- Target: Average portfolio correlation <0.40
- Max 30-40% per sector (if one sector crashes, limited damage)
- Tech, Energy, Commodities, Forex = 25-30% each
- Monthly rebalancing prevents sector drift
- Stress test: "If sector X crashes 15%, what % of my portfolio dies?"
- Grade-based sizing (A-grade = 2%, B-grade = 1%)
- Within portfolio heat limit
- Better setups get more capital (edge-weighted allocation)
- Rebalance monthly (prevent correlation/sector drift)
- Check sector allocations vs. targets
- Update correlation matrix
- Reallocate to maintain diversification
- Core + Satellite framework (60-70% core, 30-40% active)
- Core: Long-term holdings (SPY, passive income)
- Satellite: Active trading capital (where edge lives)
- Protects majority of capital during drawdowns
- Real-world case studies prove the pattern
- Rachel: -$41K (48% loss) from 100% correlated tech portfolio
- Recovery: +$14.8K (29.6% gain) with proper diversification
- Lesson: Portfolio construction matters more than individual trades
🎯 Practice Exercise: Portfolio Correlation Audit
Objective: Analyze your current portfolio for hidden correlation risk and excessive heat.
Step 1: List All Open Positions
For each position, document:
- Asset name (e.g., AAPL, SPY, BTC)
- Sector/asset class (tech, crypto, forex, commodities)
- Dollar risk ($ amount at stop loss)
- Risk percentage ($ risk / total account)
Step 2: Calculate Total Portfolio Heat
Add up all individual position risk percentages. Is total heat under 6-8%? If not, which position often you close?
Step 3: Check Sector Concentration
Group positions by sector. Calculate % of total portfolio in each sector:
- Tech: ____%
- Crypto: ____%
- Forex: ____%
- Commodities: ____%
Any sector over 40%? That's your correlation risk. One sector crash = major portfolio damage.
Step 4: Visual Correlation Check
Pull up 30-day charts of your top 3 positions side-by-side. Do they move together? If yes, you have high correlation (dangerous).
Step 5: Portfolio Rebalancing Action Plan
Based on your audit, write down 2-3 specific actions:
- Close position X (exceeds heat limit)
- Reduce sector Y exposure (too concentrated)
- Add sector Z position (for diversification)
Success metric: Portfolio heat under 8%, no single sector above 40%, low correlation between positions (< 0.5).
🎮 Quick Check
Q: You have $10,000 account. Current positions: Long AAPL (2% risk), Long NVDA (2% risk), Long TSLA (1.5% risk). You find a perfect A-grade setup in MSFT (tech stock). Should you take it at 2% risk?
You have 8 open positions: 3 tech longs, 2 energy longs, 1 financial long, 2 biotech longs. Total portfolio heat is 14% (8 positions × average 1.75% each). Market gaps down 3% overnight. What's the likely outcome?
Your current portfolio: Long SPY (4% risk), Long QQQ (3% risk), Long IWM (3% risk). All ETF index positions. Portfolio heat = 10%. Is this properly diversified?
Amateurs manage trades. Professionals manage portfolios. The difference? Professionals survive market crashes.
Related Lessons
Advanced Risk Management
Kelly Criterion, drawdown protocols, and dynamic position sizing.
Read Lesson →Volume Oracle Regimes
Adjust portfolio allocation based on market regime detection.
Read Lesson →Backtesting Reality
Validate your portfolio construction with realistic backtesting.
Read Lesson →⏭️ Coming Up Next
Lesson #32: Backtesting Reality—Avoiding the Overfitting Trap — Learn why most backtests fail live and validation methods that actually work.
Educational only. Trading involves substantial risk of loss. Past performance does not guarantee future results.
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