Mastering Closing Techniques: The Most Important Exit Decision in Stock and Futures Trading

There is a crucial yet often overlooked link in trading markets: closing positions. Many investors spend great effort finding entry points but stumble when it comes to proper exit strategies. Whether you’re a stock trader or a futures player, understanding the four key concepts—closing, open interest, liquidation, and rollover—has a profound impact on your trading success or failure.

The Core Definition and Significance of Closing Positions

The simplest way to understand closing is ending a trade. When you buy stocks or futures contracts, your position is open; when you sell those holdings, you close the position, and only then can you truly realize your profit or loss.

Many beginners think holding stocks equals trading, but in reality, holding only reflects “unrealized gains or losses”—numbers on paper. Only when you close the position do floating gains or losses turn into actual results. This is the core meaning of closing: turning uncertainty into certainty.

Taiwanese investors should pay special attention because of the T+2 settlement system. When you sell stocks (close position), the funds are only credited after two business days. This affects cash flow planning and continuous trading, so plan ahead accordingly.

Opening and Closing: Two Ends of the Trading Cycle

Opening and closing are opposite actions. Opening is entering the market to establish a position; closing is your exit point.

When opening a position, you have certain expectations—prices will rise, fall, or there are specific opportunities. You invest capital and risk tolerance, but no outcome is locked in yet. The initial account status is just “possibility,” not “fact.”

For example, if you believe Apple (AAPL) will go up and buy 100 shares at $150, you’ve opened a position. Your profit or loss depends on future price movements. If Apple rises to $160, your paper profit is $1,000, but it’s floating profit. If you do nothing and the price drops back to $140, your unrealized loss is $1,000.

Only when you sell all 100 shares at $160 do you realize the $1,000 profit. Conversely, if you sell at $140, you lock in a $1,000 loss—regardless of whether the price later rebounds.

Timing and method of closing directly influence your final results. Building a clear trading discipline is key; avoid being swayed by short-term volatility or emotions.

Unclosed Positions: A Market Depth Indicator

Unclosed positions are vital in futures and options markets, representing the total contracts not yet offset by opposite trades or settlement. In other words, it reflects how many investors still hold open positions.

When unclosed positions increase, it usually indicates new capital entering, and the current trend (bullish or bearish) may continue or extend. For example, if the Taiwan index futures rise along with increasing open interest, it suggests genuine bullish momentum, not just a fleeting rebound.

Conversely, decreasing open interest indicates investors are closing out positions, and the current trend may reverse or consolidate.

A particularly important phenomenon is “rising prices with decreasing open interest.” If the Taiwan index futures go up but open interest declines, it could be a warning sign—this rally is mainly driven by short covering rather than new buying. The foundation for the rise may be weak, and reversal risk is high.

Liquidation Risk: The Biggest Threat of Leverage Trading

Liquidation is a unique risk in futures and leveraged trading, caused by the use of borrowed funds (leverage) to amplify investment effects. With a small margin, you control a contract far larger than your capital.

Leverage is a double-edged sword. Profits can be magnified, but losses are also multiplied. When the market moves against your expectations, your account can quickly deplete. If losses exceed your margin, the exchange or broker issues a “margin call,” requiring you to top up funds immediately.

If you fail to meet the margin call within the deadline, your broker will forcibly close your position—this is liquidation. Not only does it wipe out your entire principal, but in extreme cases (like futures limit-down), you may owe significant debt.

For example, with a small Taiwan futures contract requiring a 46,000 yuan initial margin, if the market moves against you and your account drops below the maintenance margin (say, 35,000 yuan), you’ll receive a margin call. If you don’t top up, your position will be sold at market price, potentially resulting in losses exceeding your initial investment.

To avoid liquidation, risk management is essential. Set clear stop-loss points before opening a position, control individual losses (e.g., no more than 5% of your capital), and avoid excessive leverage. Many seasoned traders prefer sacrificing some high-return opportunities to ensure capital safety and survival.

Rollover: Extending Futures Positions

Rollover is a concept unique to futures trading. Futures contracts have fixed expiration dates (e.g., Taiwan index futures expire on the third Wednesday of each month). To maintain a position beyond expiration, you must perform a rollover—closing the near-month contract and opening a longer-dated one.

For example, if you are bullish on gold and buy December futures, but don’t want to deliver in December, you can sell the December contract and simultaneously buy the January contract as expiration approaches. This “rolls” your position into the next month.

Rollover involves cost considerations. In futures markets, there are “contango” (forward prices higher than spot) and “backwardation” (forward prices lower than spot). When rolling over from a near-month to a far-month contract in contango, you effectively sell low and buy high, incurring costs. In backwardation, rollover may even generate gains.

Many Taiwanese brokers offer automatic rollover services, but it’s crucial to understand their fee structures and rules to avoid hidden costs eating into profits. Manual rollover requires more effort but allows precise control over timing and prices.

If you only trade stocks or forex, rollover isn’t relevant. Mastering closing, understanding open interest, and avoiding liquidation are the core concepts.

When to Open a Position: Five Key Decision Frameworks

Opening a position seems simple but requires multi-dimensional judgment. Many losses stem from poor timing—chasing highs or guessing bottoms, only to be proven wrong by the market.

Confirm the Overall Market Direction First

Check if the main index (e.g., Taiwan Weighted Index) is in a bullish structure. Is the market above long-term moving averages like the monthly or quarterly lines? Are highs and lows gradually rising? In a bullish environment, individual stock entries are more likely to be profitable; in a bearish market, reduce or halt new positions.

Select Stocks with Solid Fundamentals

Fundamentals determine long-term potential. Prioritize companies with profit growth, revenue momentum, and supportive industry policies (e.g., semiconductors, green energy). Avoid those with declining earnings or financial concerns. Strong fundamentals help reduce the impact of black swan events after opening.

Use Technical Signals for Entry

“Breakout” signals are common: price breaking out of consolidation, surpassing previous highs with increased volume, indicating buying interest. Conversely, avoid “unconfirmed reversals”: sharp drops without breaking previous lows or with declining volume, which are dangerous.

Indicators like MACD bullish cross or RSI exiting oversold zones can help confirm signals.

Establish Clear Risk Management Plans

Before opening, set stop-loss points—e.g., exit if price drops 3-5% below breakout levels. Know your maximum tolerable loss and size your position accordingly. Using staggered entries rather than full position at once can diversify risk and cost.

Taiwanese Investors’ Opening Philosophy

Taiwanese traders favor “steady entry and quick stop-loss” rather than chasing perfect prices. It’s better to miss some opportunities than to buy into traps. The key is to follow market trends, ensure solid fundamentals, get clear signals, and control risk—meeting all four increases the success rate of entries.

When to Close a Position: Critical Exit Signals

If opening is the attack, closing is the defense. The timing of exit directly affects profit preservation and loss control. Many beginners lose profits or incur larger losses due to greed or hesitation.

Exit When Profit Targets Are Reached

Set profit goals before entering (e.g., 10% gain or hitting a moving average). Once achieved, consider partial or full profit-taking. Don’t expect prices to rise infinitely. Even in strong markets, locking in gains is prudent.

In bullish markets, you can raise your take-profit thresholds (e.g., sell if price falls back to the 5-day moving average), but always have a clear profit plan.

Exit Immediately When Stop-Loss Is Triggered

Stop-loss is fundamental. Whether using fixed points (e.g., 5% loss) or technical support levels, once triggered, exit decisively. Don’t hesitate or hope for a rebound. Many big losses happen because traders delay stop-loss execution, allowing losses to snowball.

Discipline in stop-loss execution is a hallmark of professional traders.

Exit on Fundamental Deterioration

If the stock’s earnings report disappoints or there are major negative news (e.g., high pledge ratios, policy reversals), consider exiting even if stop-loss levels aren’t hit. Deteriorating fundamentals often lead to sharp declines; preemptive exit can prevent larger losses.

Watch for Technical Reversal Signals

Pay attention to long black candlesticks, price breaking below key moving averages (20-day, 60-day), or volume surging downward. Divergences—such as price making new highs but RSI not confirming—are warning signs. These signals should prompt consideration of partial or full exit.

Flexibility in Capital Allocation and Sector Rotation

If better opportunities arise or you need to reallocate funds, consider closing weaker positions to free capital for stronger ones. Avoid being “stuck in weak stocks” and missing out on strong performers.

The Highest Level of Exit Discipline: Discipline Over Judgment

The most important aspect of closing is avoiding greed and hesitation. Successful investors predefine exit rules and strictly follow them, rather than changing plans based on emotions or market noise.

Whether reaching profit targets, hitting stop-loss, fundamental changes, or technical reversals, having clear criteria and executing decisively is the foundation of long-term profitability.