Futures trading essentials: Understand the meanings of liquidation, open interest, rollover, and closing positions all at once

There are several key terms in futures trading that many beginners find confusing. Today, we’ll clarify these concepts to resolve your doubts. While these ideas may seem complex at first, understanding them will give you more confidence to enter and exit the market.

What is a Margin Call? Why is it so dangerous?

A margin call is the most frightening outcome in futures or leveraged trading. Since futures trading requires using margin to leverage larger funds, when the market moves against your position, your account losses can quickly escalate.

Suppose you go long on a small Taiwan index futures contract, with an initial margin of NT$46,000. If the market reverses and drops, causing your losses to reduce your “maintenance margin” below the required level (for example, falling below NT$35,000), your broker will issue a margin call. If you cannot top up your margin within the deadline, the broker will forcibly liquidate your position at the current market price, which is a margin call.

The consequences of a margin call are extremely serious—you could lose all your principal and even incur debt. Therefore, traders using leverage must establish a comprehensive risk management system, including setting stop-loss points, controlling position sizes, and continuously monitoring market changes.

What does open interest tell you?

Open interest refers to the total number of futures or options contracts that have not been closed or settled through an offsetting trade or delivery. It is an important indicator of market momentum.

Implication of increasing open interest: It indicates continuous inflow of new funds, suggesting the current trend (bullish or bearish) may continue. For example, if the Taiwan index futures are rising and open interest is also increasing, it implies strong bullish momentum and a higher probability of further gains.

Implication of decreasing open interest: Investors are closing their positions, and the current trend may be nearing its end. The market could enter consolidation or reversal. Be especially cautious—if the index is rising but open interest is shrinking, it signals that the rally is mainly driven by short covering rather than new buying, indicating the upward move may lack a solid foundation.

What is closing a position, and how is it different from opening one?

Closing a position means ending your trade by selling all or part of your holdings in stocks, futures, or other assets. It is the opposite of opening a position.

Opening a position is when you initiate a trade—buying or selling an asset—hoping the price will move in your favor. When you open a position, you only hold an unrealized profit or loss; the actual profit or loss is only realized when you close the position.

Example: Suppose you are bullish on Apple stock (AAPL), and you buy 10 contracts. This opens a long position. You can add to or reduce your holdings later, but as long as you hold the stock, your position remains open. When Apple reaches a price you are satisfied with or you want to exit due to risk considerations, you sell all 10 contracts, closing your position.

The timing and method of closing directly impact your trading success. Closing too early may miss further gains; closing too late may result in losses. Learning to close positions wisely is essential for becoming a smart trader.

Note: Taiwan stocks follow a T+2 settlement system, meaning funds from sales are only available two business days later. Be mindful of this when planning your cash flow.

What is rollover, and why is it unique to futures?

Rollover means converting your existing futures contract into another with a different expiration date. This 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). If you are optimistic about a long-term trend and want to maintain your position, you cannot hold the expiring contract indefinitely. You need to perform a rollover—selling the near-month contract and buying a longer-dated contract—to extend your trading horizon.

Why is rollover important? Because it involves costs and timing considerations.

• Contango (Positive spread): The price of the longer-dated contract is higher than the near-month. Rollover involves selling low and buying high, incurring costs.
• Backwardation (Negative spread): The longer-dated contract is cheaper than the near-month. Rollover can generate profits by selling high and buying low.

Many domestic and international brokers offer “automatic rollover” services, but it’s crucial to understand their rules and fees. Manual rollover allows you to choose the best timing and price.

When is the right time to open a position? The core decision rules

Before opening a position, ask yourself why you are entering: Are you bullish on the medium to long-term trend? Do you want to capture volatility? Are you building a portfolio? Are you engaging in arbitrage? Each reason requires corresponding entry signals.

Step 1: Confirm the overall market environment
Check if the main index (e.g., weighted index) is above key moving averages (monthly, quarterly) or showing an upward structure (higher highs and higher lows). When the market is in a bullish environment, individual stock entries tend to be more successful; in a bearish market, reduce positions or avoid opening new ones.

Step 2: Assess the fundamental health of the stock
Focus on whether the stock has profit growth, increasing revenue, or industry support (e.g., semiconductors, green energy themes). Avoid stocks with declining earnings or financial concerns. Solid fundamentals are the first line of defense against risk.

Step 3: Look for technical signals
Most common: breakout signals—price breaking above consolidation or previous highs with increased volume, indicating genuine buying interest. Avoid stocks that drop below previous lows with shrinking volume. Indicators like MACD bullish cross or RSI moving out of oversold zones can serve as confirmation.

Step 4: Set stop-loss before entering
Always predefine your stop-loss level (e.g., 3%-5% below entry price). Confirm your risk tolerance before sizing your position. Avoid full allocation to one stock to prevent excessive risk.

In short, the golden rule for opening a position is: “Follow the trend, ensure support at the stock level, have clear signals, and control risk.” Taiwanese investors tend to prefer “steady entry and quick stop-loss.” Instead of chasing perfect entry points, it’s better to miss some opportunities than to buy recklessly.

When should you close a position? Three key timing points

Closing decisions are equally important. Sometimes you should take profits; other times, cut losses; sometimes, exit due to fundamental changes.

Timing 1: Achieving your preset profit target
Set profit-taking points before entering (e.g., 10% gain or reaching a specific moving average). Once reached, take profits gradually to avoid turning gains into losses. If the market remains strong, you can keep part of the position and raise your stop-loss (e.g., exit if it falls below the 5-day moving average).

Timing 2: Triggering your stop-loss
Whether it’s a fixed point loss (e.g., 5%) or a technical stop-loss (breaking support levels or moving averages), once triggered, execute decisively. A common saying in Taiwan’s investment circles: “Stop-loss is the basic credit of investing”—only strict stop-loss can control losses.

Timing 3: Fundamental changes
If the stock’s earnings report disappoints or there are major negative news (e.g., high pledge ratios, policy reversals), even if the stop-loss isn’t hit, it’s wise to exit early to prevent further deterioration.

Timing 4: Technical reversal signals
Long black candlesticks, breaking key moving averages (20-day, 60-day), volume spikes, or divergence in indicators (price making new highs but RSI not following) are all signals to close. Many retail investors rely on technical analysis; don’t ignore these signals.

Timing 5: Capital reallocation needs
If you find more attractive opportunities or need to free up funds, prioritize closing weaker positions to allocate capital to higher-potential assets, avoiding being “stuck in weak stocks” or missing strong ones.

The biggest enemies of closing are greed and hesitation. Establish rules, stick to them strictly, and adjust according to your risk appetite to protect profits and control risks.