Understanding the meaning of closing a position finally! Clarify opening, closing, liquidation, and transferring positions all at once

In trading markets, you often hear terms like “closing position,” “opening position,” and “liquidation,” but what do these words really mean? Today, I will explain each one, especially clarifying the core concept of “closing position,” and when to close or open a position.

What Does Closing a Position Mean? The Key to Ending a Trade and Confirming Profit or Loss

Simply put, closing a position means actively ending a trade. Whether you hold stocks, futures, or other financial instruments, closing a position involves selling (or buying back) all or part of your holdings to officially settle the trade.

The main significance of closing a position is: only when you close can your profit or loss be finalized. Before closing, your unrealized gains or losses are just “floating,” fluctuating with market movements; once you close, that number becomes your actual “realized profit or loss,” which cannot be changed.

This is why closing a position is so crucial — it’s not just an operation, but the final step in confirming your investment outcome.

Opening vs Closing: The Start and End of a Trade

To understand what closing a position means, you first need to understand its opposite: “opening a position.”

Opening a position means initiating a trade, buying or selling a financial instrument, expecting its price to move favorably. But at this stage, you haven’t actually made a profit or incurred a loss — because the trade is still ongoing.

For example, suppose you are bullish on Apple stock (AAPL). You buy 100 shares at $150. This buy action is called “opening a position.” Later, if Apple’s stock rises to $160 or $170, your unrealized profit looks good, but it’s still just “floating gains.”

Only when you decide to sell all 100 shares does the “closing a position” happen. The price at which you sell determines your final profit or loss — for instance, selling at $165 means you’ve locked in a profit of $1,500 (excluding fees).

The relationship between opening and closing is: start and finish, begin and end. Without closing, the trade remains unsettled; with closing, you can determine success or failure.

Note: Taiwan’s stock market uses a “T+2 settlement” system, meaning that when you sell stocks (close a position), the funds are only credited two business days later. Be mindful of this in your cash planning.

What Is Unclosed Position (Open Interest)? An Important Indicator of Market Strength

If closing a position means “ending a trade,” then open interest refers to “how many trades are still open.”

Specifically, open interest indicates the total number of contracts in futures or options markets that have not yet been offset through an opposite transaction or settled. It’s a key window into market participation and the momentum of bulls and bears.

What does an increase in open interest imply?

New capital continues to flow into the market, and the current trend (bullish or bearish) may have strong momentum to continue. For example, if Taiwan index futures rise along with increasing open interest, it usually indicates strong bullish sentiment with continuous new buying.

What about a decrease in open interest?

Investors are closing their positions, and the current trend may be nearing its end, with a potential market reversal or consolidation. This serves as a warning signal, suggesting you might need to adjust your strategy.

A particularly important phenomenon: if the Taiwan index futures price rises but open interest decreases, it may indicate that the rally is mainly driven by short covering (forced buying) rather than new long positions, implying the upward move may lack a solid foundation and could reverse later.

How Dangerous Is a Margin Call? The Ultimate Warning in Leverage Trading

Liquidation (margin call) is a risk unique to futures and leveraged trading. It occurs when investors use borrowed funds (leverage) to trade. Leverage is attractive because it allows controlling large positions with a small amount of margin, amplifying potential gains.

However, it also magnifies risks. When the market moves against your position, your account can quickly incur losses that exceed your initial investment. At this point, the exchange or broker will require you to add more margin; if you fail to do so, they will forcibly close your position — this is called “liquidation.”

For example:

Suppose you go long on a mini Taiwan index futures contract with a margin of NT$46,000. If the market suddenly moves downward, your losses accelerate. When your account’s equity drops below the maintenance margin (say NT$35,000), you receive a margin call.

You have two choices: top up your margin or accept a loss. If you cannot respond in time, the broker will automatically close your position at market price, resulting in liquidation. The consequences are often severe — not only losing your principal but potentially owing money to the broker.

This underscores the importance of disciplined risk management when using leverage. Set strict stop-loss and take-profit levels, monitor your account balance regularly, and avoid letting risks spiral out of control. If you want to avoid this risk altogether, consider trading without leverage or with very low leverage.

What Is Rollover (Transferring Positions)? A Must-Know Operation for Futures Traders

Rollover is a concept unique to futures trading, not relevant to stock investors.

Simply put, rollover means exchanging your current contract for another with a later expiration date.

Futures contracts have fixed expiration dates (e.g., Taiwan index futures expire on the third Wednesday of each month). As the expiration approaches, if you want to maintain your position (because you’re bullish), you need to rollover — converting the near-month contract into a longer-dated one, extending your trading horizon.

Considerations for rollover costs:

• Contango (Positive Spread): Longer-dated futures are priced higher than near-term ones. Rollover involves selling low and buying high, incurring extra costs.
• Backwardation (Negative Spread): Longer-dated futures are priced lower than near-term ones. Rollover can be profitable or costless.

Many brokers in Taiwan offer “automatic rollover” services for convenience, but it’s important to understand their rules and fees to avoid hidden costs. Manual rollover allows you to choose the best timing and price, offering more flexibility but requiring more experience.

If you only trade stocks or forex, you don’t need to worry about rollover; understanding closing, opening, and risk management is sufficient.

When Should You Open a Position? 3 Key Logic Checks for Steady Entry

Opening a position may seem straightforward, but it involves considerable skill. The timing of your entry directly impacts your overall success.

First, look at the overall market trend:

Prioritize whether the main index (e.g., Taiwan Weighted Index) is above key moving averages (like the monthly or quarterly moving average) or in an upward structure (higher highs and higher lows). When the market is in a bullish environment, individual stock entries have higher profit potential; in a bearish market, try to reduce positions or avoid opening new ones.

Following the main trend increases your chances of success.

Next, analyze the fundamentals of the target stock:

Check if the company has profit growth, increasing revenue, or benefits from industry policies (e.g., semiconductors, green energy). Avoid stocks with declining earnings or financial issues. Solid fundamentals reduce the risk of sudden negative surprises after opening.

Finally, confirm technical signals:

Common positive signals include “breakouts” — stock price breaking above consolidation or previous highs with increased volume, indicating strong buying interest. This increases the probability of a successful entry.

Avoid “uncertain reversals” — sharp declines without breaking previous lows, or declining volume during dips, which may signal weakness. Don’t rush to buy falling knives.

Indicators like MACD bullish cross or RSI moving out of oversold zones can serve as additional confirmation.

**Most importantly, risk control: ** Before opening, set a stop-loss to limit maximum loss, and determine your position size accordingly. Avoid full positions on a single stock to prevent excessive risk.

In short, the golden rule for opening a position is: “Follow the trend, ensure support, confirm signals, and control risk.” Taiwanese investors tend to prefer cautious entries with quick stops, even if it means missing some opportunities, to avoid reckless trading.

When Should You Close a Position? 4 Signals That Indicate It’s Time to Exit

Compared to cautiousness in opening, decision-making for closing positions often tests your psychological resilience. Knowing when to take profits or cut losses is not easy.

First signal: You’ve reached your preset profit target

Before entering, set a profit target, such as a 10% gain or hitting a specific moving average. Once achieved, consider partial or full profit-taking to lock in gains. Especially in flat markets, strict adherence to targets prevents greed from eroding profits.

In strong market conditions, you might hold some positions to try for more, but always adjust your take-profit levels accordingly (e.g., exit if price falls below the 5-day moving average) to avoid turning gains into losses.

Second signal: Triggered your stop-loss

Stop-loss is fundamental but often hard to implement. Whether using fixed points (e.g., 5% loss) or technical support levels (e.g., breaking below a support line or moving average), once triggered, execute decisively.

Taiwanese investors often say “Stop-loss is the basic credit of investing,” and it’s true. Recognizing mistakes and cutting losses promptly is better than stubbornly holding onto losing positions.

Third signal: Fundamental deterioration

If a stock suddenly reports bad news — poor earnings, major negative events (e.g., large pledge of shares by executives, policy shifts, loss of competitive advantage) — consider closing even if stop-loss levels aren’t hit.

Fundamental decline often signals deeper issues; rather than betting on a rebound, it’s better to exit and redeploy capital elsewhere.

Fourth signal: Technical reversal signs

Indicators such as long black candlesticks, price breaking below key moving averages (20-day, 60-day), volume spikes on declines, or bearish divergence (price making new highs but RSI not following) are warning signs. In Taiwan’s market, retail traders rely heavily on technical analysis, and when these signals appear, a significant downturn may be imminent.

Finally, consider capital reallocation:

If better opportunities arise or you need funds elsewhere, consider closing weaker positions to free up capital, avoiding being stuck in underperformers while missing stronger stocks.

The biggest enemies of closing are “greed” and “hesitation.” Develop rules based on your trading plan, risk tolerance, and market conditions, and stick to them strictly. Only then can you preserve profits and control risks. Remember, closing a position is about confirming your success or failure — don’t let hesitation ruin your original decision.