The four major trading operation terms: closing position, open interest, liquidation, and transfer of position—understand them all at once

What is “closing a position” in your investment account? Why do traders always talk about closing, open interest, and liquidation? Don’t let these terms become obstacles on your financial management journey. This article will help you fully understand and learn when to exit and when to enter the market.

Opening and Closing Positions: The Two Ends of Trading

Opening a position is the start of trading—you decide to buy or sell an asset, such as stocks, futures, or forex. But when you open a position, you haven’t yet realized profit or loss; you’re just establishing a position. The amount of profit or loss depends on the market’s subsequent movement.

What is closing a position? Simply put, it means ending this trade. You sell all held assets (if long) or buy back all short positions (if short), officially closing the position. Only when you close a position is your profit or loss truly realized, allowing you to calculate returns and investment performance.

For example, suppose you are bullish on Apple stock AAPL and buy 100 shares. As long as you hold these 100 shares, your position remains open, and unrealized gains or losses are just paper profits. When you think the price has risen to a satisfactory level and decide to sell all, you complete the closing process, and your profit or loss is finalized.

A quick tip for Taiwan stocks: Taiwan uses a T+2 settlement system. After selling stocks (closing a position), the actual funds will be credited two business days later. Be sure to reserve funds accordingly.

Unclosed Positions (Open Interest): A Market Depth Indicator

Unclosed positions refer to the total number of contracts in futures or options markets that have not yet been closed. It’s an important indicator to observe market bullish or bearish momentum.

An increase in open interest indicates new capital entering the market, suggesting the current trend (bullish or bearish) may continue. For example, when the Taiwan index futures rise and open interest also increases, it shows new buying power entering, indicating a solid foundation for the rally.

A decrease in open interest suggests traders are closing their positions, and the current trend may be nearing its end, possibly leading to reversal or consolidation.

A warning signal: If the Taiwan index futures price rises but open interest declines, this rally might be driven by short covering (buybacks) rather than new longs entering. The upward move could be fragile, and subsequent volatility is possible.

Liquidation (Liquidation Risk): The Ultimate Risk in Leverage Trading

Liquidation mainly occurs in futures or leveraged trading because traders only need a small margin to control a larger position. This amplifies profit potential but also increases the risk of significant losses.

When the market moves against your position, your account’s losses grow. If your margin falls below the maintenance margin level, the broker will issue a margin call, requiring you to deposit more funds. If you cannot meet the margin call in time, the platform will forcibly close your position—that’s liquidation.

Real-world example: You open a long position on a small Taiwan index futures contract with an initial margin of NT$46,000. If the market moves downward and your losses reduce your margin below NT$35,000, you receive a margin call. If you fail to top up the margin, the broker will liquidate your position at market price, resulting in liquidation.

The consequences are severe: not only do you lose your entire principal, but you might also incur debt. Therefore, traders using leverage must have strong risk management skills, set stop-loss and take-profit points in advance. If you have limited risk tolerance, consider trading without leverage or with very low leverage.

Rolling Over (Position Transfer): A Unique Futures Operation

Rolling over is specific to futures trading—when your contract is about to expire but you believe in the long-term trend and don’t want to exit, you transfer your near-month contract into a longer-term one.

For example, you bought December gold futures, expecting prices to rise, but find that December’s market demand is weak and prices might fall. You can roll over to January futures to extend your trading period.

Cost considerations for rollover:

• Contango (Positive spread): When the distant month price is higher than the nearby month, rolling over involves selling low and buying high, incurring costs.
• Backwardation (Negative spread): When the distant month price is lower than the nearby month, rolling over can be profitable as you sell high and buy low.

Many Taiwanese brokers offer automatic rollover services, but it’s important to understand their rules and fees. Manual rollover allows you to choose the best timing and price, offering more flexibility.

Note: Stocks and forex do not have rollover concepts; just focus on closing, open interest, and liquidation.

When to Open a Position? Finding the Right Entry Point

Deciding when to open a position should be based on “trend confirmation + signal verification”—avoid blindly following the market or guessing tops and bottoms. Here are practical guidelines:

Confirm the overall market trend: Check if the weighted index is above key moving averages (monthly, quarterly) or in an upward structure (higher highs and higher lows). A bullish market environment increases the success rate of individual stock entries; in a bearish market, reduce or avoid opening new positions.

Assess the fundamentals of individual stocks: Focus on companies with profit growth, increasing revenue, or supportive policies (like semiconductors or green energy). Avoid stocks with declining earnings or financial concerns. Solid fundamentals help reduce unexpected risks after opening a position.

Look for technical signals: The most common is a “breakout”—the stock price surpasses a consolidation zone or previous high, accompanied by increased volume (volume and price rising together), indicating buying interest. Avoid stocks showing “uncertain reversals,” such as falling without breaking previous lows or shrinking volume, which could be false signals. Indicators like MACD bullish cross or RSI exiting oversold zones can help confirm entry signals.

Prioritize risk management: Before opening a position, set a stop-loss (e.g., 3-5% below the breakout price). Confirm your risk tolerance and position size accordingly. Avoid full exposure to a single stock to prevent excessive risk.

The core idea is “trend-following, supported by fundamentals, clear signals, and risk control.” Taiwanese investors prefer “steady entries and quick stops,” even if it means missing some opportunities rather than buying recklessly.

When to Close a Position? Mastering Exit Timing

The key to closing a position is “trend-following, stop-loss to protect capital, and locking in profits without greed.” Consider closing in these situations:

Achieving your profit target: Before entering, set a profit-taking point (e.g., 10% gain or reaching a certain moving average). Once reached, take profits gradually to avoid giving back gains. If the market momentum remains strong, you can leave part of the position but adjust your take-profit points accordingly, such as closing if the price falls below the 5-day moving average.

Reaching your stop-loss: Whether using a fixed point (e.g., 5% loss) or technical support levels (support lines or moving averages), once triggered, exit decisively. Taiwanese investors often say “stop-loss is the basic credit of investing”—delaying stops often leads to larger losses.

Fundamental negative news: If the stock’s earnings are disappointing or there’s a major negative event (e.g., high pledge ratios, policy shifts), even if your stop-loss isn’t hit, it’s wise to exit early to avoid further deterioration.

Technical reversal signals: Long black candlesticks, breaking important moving averages (20-day, 60-day), volume spikes, or divergence in indicators (price making new highs but RSI not following) are warning signs to exit. Many Taiwanese retail traders rely on technical analysis for decision-making.

Capital reallocation needs: If better opportunities arise or you need funds elsewhere, consider closing weaker positions to free up capital, ensuring efficient use of funds and avoiding being stuck in weak stocks or missing strong ones.

Final Advice

What is closing a position, and when to do it? It may seem simple but actually tests your trading discipline and psychological resilience. The most common mistakes are “greed”—refusing to exit—and “hesitation”—delaying too long.

Successful investors set rules based on their strategy, risk tolerance, and market conditions, and strictly follow them. Only then can you preserve profits, control risks, and avoid liquidation disasters. Remember: it’s okay if you can’t find the perfect entry point; once you’re in, you must know exactly when to exit.