Understanding what closing a position means: the core concept in futures and stock trading

What Does Closing a Position Mean?

Closing a position essentially means ending your trade. Whether it’s stocks, futures, or options, closing a position involves settling all or part of your holdings and exiting the market.

In simple terms, what does closing a position mean? It signifies the end point of a trade — only after closing can you definitively determine whether the trade was profitable or a loss. Many beginners often confuse opening and closing positions, but these two concepts are actually two ends of the trading spectrum.

For example: Suppose you are bullish on Apple stock(AAPL) and buy 100 shares at $100. At this point, you have opened a position — establishing a long position. Later, if the stock price rises to $110 and you decide to sell all 100 shares, this selling action is closing the position. Only after closing can you confirm a profit of $1,000.

Opening and Closing Positions: The Two Sides of Trading

Opening and closing are opposite concepts. Opening a position is your act of entering the market and starting a trade, meaning you hold a position but the outcome is not yet determined; closing a position is actively or passively ending the trade, locking in the final profit or loss.

During the holding period, you can increase or decrease your position based on market changes, but as long as you have an open position, you are still exposed to market risk.

Important reminder (Taiwan stock investors): Taiwan’s stock market operates under a “T+2” settlement system. This means that stocks sold today will settle and funds will be credited two days later. Therefore, when planning your cash flow, you must leave enough time for settlement.

Open Interest: An Indicator to Insight Market Depth

Open interest refers to the total number of outstanding contracts in futures or options markets that have not yet been closed or settled. It is an important indicator for assessing market participation and trend strength.

Implications of increasing open interest:

• Continuous influx of new capital into the market
• The current trend (bullish or bearish) is likely to continue
• Example: When the Taiwan index futures rise along with increasing open interest, it indicates solid bullish momentum

Implications of decreasing open interest:

• Investors are closing out their positions
• The current trend is nearing its end
• The market may soon reverse or enter consolidation

Warning signal: If the Taiwan index futures price rises but open interest declines, it usually indicates that the rally is mainly driven by short covering rather than new long positions, suggesting the upward move may lack a solid foundation.

Liquidation (Margin Call): The Greatest Risk in Leverage Trading

Liquidation mainly occurs in futures or leveraged trading. Since these trades allow investors to leverage larger positions with margin, market reversals can cause losses to quickly exceed the initial capital.

Mechanism of liquidation:

When your account incurs losses that reduce your maintenance margin below the required level, the broker issues a “Margin Call”(Margin Call). If you cannot top up the margin within the specified time, the platform will forcibly close your positions, resulting in liquidation.

Real-world example: Suppose you go long on a mini Taiwan index futures contract with an initial margin of NT$46,000. If the market moves against you and your losses reduce your account equity below NT$35,000, you will receive a margin call. If you fail to deposit additional funds, the broker will forcibly close your position at market price — this is liquidation.

Liquidation can be devastating — not only losing your principal but potentially owing debts. Therefore, leveraged investors must:

• Have disciplined risk management
• Set clear stop-loss and take-profit levels in advance
• Constantly monitor their account status
• Consider using lower leverage or no leverage at all

Rolling Over: A Must-Know for Futures Investors

Rolling over is a futures-specific operation, referring to converting expiring contracts into later-month contracts. For example, if you hold December gold futures but want to maintain a bullish position on gold, you need to roll over your position before the December contract expires, switching into January futures.

Why is rollover necessary?

Futures contracts have specific expiration dates (e.g., Taiwan index futures expire on the third Wednesday of each month). If you are bullish on a long-term trend and do not want to close your position, you must roll over; otherwise, the contract will automatically settle at expiration.

Cost considerations of rollover:

Rollover involves a price difference:

• Contango(Contango): When the longer-term contract price is higher than the nearby month, rolling over involves selling low and buying high, incurring a cost.
• Backwardation(Backwardation): When the longer-term contract price is lower than the nearby month, rolling over can be profitable as you sell high and buy low.

Advice for Taiwanese investors: Many domestic and international brokers offer automatic rollover services, but it’s crucial to understand their rules, cost structures, and timing. Manual rollover requires active management but allows you to choose the optimal timing and price.

If you only trade stocks or forex, rollover is not relevant; focus on understanding closing, open interest, and liquidation concepts.

When Is the Right Time to Open a Position? A Scientific Approach to Entry Timing

Deciding when to open a position should be based on multiple factors, not just intuition or chasing the trend. Here is a systematic decision-making process:

Step 1: Confirm the overall market environment

Prioritize checking whether the main index (e.g., Taiwan Weighted Index) is in a bullish environment (price above moving averages, higher lows and highs). When the market is trending upward, individual stock entries tend to have higher success rates; in a bearish market, be cautious or limit position sizes.

Step 2: Review individual stock fundamentals

Choose stocks with growth in earnings, rising revenue, and industry support (e.g., semiconductors, green energy). Avoid stocks with declining performance or financial concerns.

Step 3: Use technical signals for entry

• Breakout entries: Price breaks through consolidation or previous high with increased volume, indicating new buying interest
• Avoid false reversals: Stocks that drop sharply but do not break previous lows and have declining volume are risky
• Use indicators for confirmation: MACD bullish crossover, RSI exiting oversold zones

Step 4: Plan risk management in advance

Set stop-loss points (e.g., 3-5% below entry price), determine maximum acceptable loss, and decide position size accordingly. Avoid full positions to prevent excessive risk from a single stock.

The key to successful entries is: “Follow the trend of the big environment, ensure individual stocks have support, signals are clear, and risks are controlled.”

When Should You Close a Position? Lock in Profits and Protect Capital

Closing a position is the real test in practice — it’s not just ending a trade but a critical decision that determines your final profit or loss.

Core principles of closing:

• Follow the trend
• Cut losses promptly
• Avoid greed

Achieve preset targets

Set clear profit-taking points when entering (e.g., 10% gain, or reaching a moving average). Once targets are hit, consider partial profit-taking to lock in gains and avoid giving back profits. During strong markets, you may hold some positions to chase further gains but should adjust your take-profit levels accordingly (e.g., close all if the price falls below the 5-day moving average).

Trigger stop-loss

Whether using fixed points (e.g., 5% loss) or technical support levels (e.g., breaking the support or moving averages at entry), once triggered, execute decisively. “Stop-loss is a fundamental skill in investing” — Taiwanese investors are very familiar with this phrase. Delaying closure only enlarges losses.

Fundamental deterioration

If the stock’s fundamentals worsen (e.g., poor earnings, high pledge ratios, adverse industry policies), even if stop-loss levels are not hit, it’s prudent to close the position first. Deteriorating fundamentals often signal imminent sharp declines.

Technical reversal signals

Signs include long black candlesticks, breaking key moving averages (20-day, 60-day), volume spikes on down days, or divergence in indicators (e.g., stock making new highs but RSI not following). These are common technical signals for closing.

Capital reallocation

If better opportunities arise or you need to free funds, consider closing weaker positions to improve capital efficiency and avoid being stuck in weak stocks or missing strong ones.

The most important rule for closing: avoid greed and hesitation. Set clear closing rules and follow them strictly — this is the only way to preserve profits and control risks in trading.

Summary: Understanding what closing a position means is about grasping the logic of the trade’s end point. Whether opening or closing, having a plan, discipline, and risk awareness are essential for steady profits in the market.