Understand the meaning of closing positions and grasp the trading lifeline: the four key position concepts you must know

In the trading world, the four most commonly heard terms—Close Position, Open Position, Liquidation, Roll Over—are also the easiest to confuse. Understanding the true meaning of these terms is not just about learning terminology, but about mastering the key to fund safety.

Opening and Closing Positions: Two Actions That Decide Your Profit or Loss

Opening a position means entering the market, closing a position means exiting; together, they form the complete trading cycle.

When you open a position, you are simply holding a certain asset; your account may show gains or losses, but the outcome is not yet locked in. Only when you close the position does the trade truly conclude—your profit or loss is confirmed.

For example, suppose you are bullish on Apple stock AAPL and buy at a certain price. During the holding period, you can increase or decrease your holdings, but as long as you still hold AAPL, your position remains open. When Apple rises to a satisfactory price, or you decide to no longer risk a decline, you sell all your shares—that is what we call a true closing of the position.

Deeper meaning of “closing”: It’s not just about selling; it also signifies that you have finalized the result of this trade. The timing and method of closing directly affect how much you can earn or lose, so closing is not a casual action but a skill that requires precise judgment.

Taiwanese stock investors should pay special attention to the “T+2 settlement system”—when you sell stocks (close position) today, the funds will only be credited after two business days. Don’t overlook this detail when planning your funds.

Open Interest: A Barometer of Market Momentum

Open interest is the total number of contracts in futures or options markets that have not been offset by an opposite transaction or settled. It is an important indicator for observing market depth and trend sustainability.

An increase in open interest usually indicates continuous inflow of new funds, suggesting that the current trend (bullish or bearish) may continue. For example, if the Taiwan index futures are rising and open interest is also increasing, it indicates strong bullish momentum with potential for further gains.

A decrease in open interest suggests traders are closing their positions, and the current trend may be nearing its end, with possible reversals or consolidations.

Be especially cautious of this scenario: Taiwan index futures prices are rising, but open interest is decreasing. This often indicates that the rally is not driven by new buying but by short covering (forced buying), implying the upward move is unstable and risks could erupt at any time.

Liquidation: The Ultimate Fear for Leverage Traders

Liquidation mainly occurs in futures or leveraged trading. Since these trades require borrowing funds (using leverage) to amplify gains, investors only need to put up a small margin to open a position. But when the market moves against them, losses can quickly erode the principal.

Exchanges or brokers will issue margin calls when the account’s losses reach the “maintenance margin” threshold. If the investor cannot top up the margin in time, the platform will forcibly close all positions—this is liquidation.

Liquidation example: Suppose you go long on a small Taiwan index futures contract with an initial margin of NT$46,000. If the market moves downward and your account’s losses reduce your margin below the maintenance margin (say NT$35,000), the broker will notify you to add funds. If you fail to do so within the deadline, the broker will liquidate your position at market price, resulting in a forced closure—this is liquidation.

The cost of liquidation is terrifying: not only can you lose all your principal, but you might also incur debt. That’s why risk management is crucial for leveraged traders—setting stop-loss and take-profit points, and constantly monitoring market changes.

Honestly, if you’re not confident in your risk management skills, the simplest approach is to avoid leverage altogether or use very low leverage ratios.

Roll Over: A Must-Learn for Futures Traders

Roll over is a concept unique to futures trading—converting an existing contract into another with a different expiration date.

Futures contracts have fixed expiration dates (for example, Taiwan index futures expire on the third Wednesday of each month). If you are bullish on the long-term trend and don’t want to close your position, you need to roll over, swapping the expiring contract for a longer-dated one, extending your trading horizon.

Roll over also involves costs and benefits:

In a contango market, where longer-dated contracts are priced higher than near-term ones, rolling over involves selling low and buying high, incurring costs.

In a backwardation market, where longer-dated contracts are priced lower than near-term ones, rolling over can allow you to sell high and buy low, potentially generating profits.

Many Taiwanese brokers offer automatic roll-over services, but it’s essential to understand their rules and costs beforehand. Manual roll-over allows you to choose the best timing and price.

If you only trade stocks or forex, you generally don’t need to worry about roll-over.

When to Open a Position? Practical Judgment Logic

Opening a position should not be done casually; otherwise, you risk chasing highs, missing opportunities, or buying at the wrong time. Here are some common simple judgment criteria used by Taiwanese investors:

First, confirm the overall market direction: Check if the weighted index is above key moving averages (like the monthly or quarterly moving average), or if it’s in an upward structure (higher highs and higher lows). In a bullish environment, individual stock entries have higher success rates; if the market is in a downtrend, try to open fewer positions or reduce your holdings.

Review the fundamentals of the stock: Focus on whether the target stock has profit growth, increasing revenue, or industry support (such as semiconductors, green energy, etc.). Avoid stocks with declining earnings or financial concerns. Solid fundamentals help reduce sudden risks after opening.

Use technical analysis for entry points: Common signals include “breakout” patterns—price breaking above consolidation or previous highs, combined with increased volume (volume-price confirmation). This indicates buying interest and can be a good entry point. Avoid situations where the trend reversal is not confirmed—sharp declines without breaking previous lows, or decreasing volume, are warning signs. Indicators like MACD bullish cross or RSI moving out of oversold zones can help validate your judgment.

Prioritize risk control: Before opening, set stop-loss points (e.g., 3-5% below the breakout price), and determine the maximum loss you can tolerate. Don’t go all-in; diversify to avoid excessive risk from a single stock.

In short, the golden rule for opening a position is “Follow the trend, find support in the stock, look for clear signals, and control risks first.” The Taiwanese market favors “steady entry and quick stop-loss”—it’s better to miss an opportunity than to buy recklessly.

When to Close a Position? Seize the Exit Opportunity

Timing for closing a position is equally critical. The core principle is: Follow the trend, cut losses early, and take profits without greed.

When reaching your preset target: Before entering, set a profit-taking point (e.g., 10% gain or reaching a specific moving average). Once the target is hit, close part of the position gradually to avoid the “profit turns into loss” scenario. If the market remains strong, you can leave some holdings to try for more gains, but always adjust your take-profit points accordingly (e.g., close if the price falls below the 5-day moving average).

When hitting your stop-loss: Whether it’s a “fixed point loss” (e.g., cut at 5% loss) or a “technical stop-loss” (e.g., breaking support levels or moving averages), once the condition is triggered, close the position decisively. Taiwanese investors often say “Stop-loss is the basic skill of investing”—not executing stop-loss will only let losses snowball.

When the fundamental outlook worsens: If the stock’s financial reports are disappointing or there are major negative news (such as high pledge ratios or policy reversals), even if you haven’t hit your stop-loss, consider closing early to avoid further damage from deteriorating fundamentals.

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

When funds have better opportunities elsewhere: If you find more attractive investment opportunities or need to reallocate capital, consider closing weaker positions first to maximize capital efficiency and avoid being “stuck in weak stocks and missing strong ones.”

The biggest enemies of closing are “greed” and “hesitation.” You must set rules based on your strategy, risk tolerance, and market conditions, and stick to them strictly. Only then can you preserve profits and control risks. Remember: Good closing decisions are more crucial to your final returns than perfect timing for opening.