Position Management in Futures Trading: A Complete Guide from Opening to Closing

In the futures, leverage, and other derivatives markets, “closing a position” is often the most frequently asked question by beginners. Simply put, closing a position means ending a trading position by offsetting all contracts through opposite trades or settlement. This is the critical moment that determines profit or loss. However, before understanding what closing a position means, we need to grasp related concepts such as opening a position, unrealized profit and loss, liquidation, and rollover, so as to avoid common pitfalls in actual trading.

Opening and Closing Positions: Two Ends of Position Management

Opening a position is the starting point of trading. When you decide to buy or sell an asset, you are opening a position. At this stage, you have not locked in profit or loss; you are establishing a pending trading position, waiting for market changes to validate your judgment.

Closing a position is the end of trading. When you sell the previously bought position (or buy back the previously sold position), you complete the closing. Only at the moment of closing does your profit or loss turn from paper to actual result. This is why the timing and method of closing a position can directly impact your return and risk-reward ratio.

For example, suppose you are bullish on TSMC stock and buy 100 shares at a certain price. During the period you hold these shares, the trade is in an “unrealized state.” When you judge that the stock price has risen to a satisfactory level or do not want to bear further downside risk, you decide to sell all, completing the closing. Only then can you confirm whether the trade was profitable or a loss.

Note: The Taiwan stock market adopts a “T+2 settlement system,” meaning funds from closing a position today will be credited after two business days. Be especially mindful of this mechanism when planning your funds.

Market Significance of Open Interest

Open interest refers to the total number of contracts in futures or options markets that have not been offset through opposite trades or settled. This indicator reflects market depth and the ebb and flow of bullish and bearish momentum.

An increase in open interest usually indicates continuous inflow of new funds, suggesting the current trend (bullish or bearish) is likely to continue. For example, if the Taiwan index futures’ open interest rises along with the price increase, it indicates strong bullish momentum with new buyers entering the market.

Conversely, a decrease in open interest suggests investors are gradually closing their positions, and the current trend may be nearing its end, with the market facing a reversal or consolidation. Particularly, if the Taiwan index futures’ price rises but open interest declines, it may indicate that the rally is mainly driven by short covering rather than new long positions, implying the upward move is not well-founded.

Timing of Closing a Position

In actual operation, the timing of closing a position is crucial. The key principles are “follow the trend, stop-loss to protect capital, and take profits without greed.”

When reaching your preset profit target, consider closing in stages. Set a profit-taking point before entering (e.g., a 10% increase or reaching a specific moving average). Once triggered, gradually reduce your position to avoid turning profits into losses. In a strong bullish market, you may retain part of your position but should adjust your take-profit levels promptly, such as closing all when the price falls below the 5-day moving average.

When hitting a stop-loss level, execute decisively. Whether it’s a fixed point loss (e.g., close when losing 5%) or technical support levels (e.g., breaking below the support at entry or key moving averages), once the condition is triggered, close immediately. Do not hold onto the hope that the market will turn around.

When fundamental deterioration occurs in a listed company, even if the stop-loss has not been hit, prioritize closing the position. Poor earnings reports, major negative news (such as high pledge ratios of directors), or industry policy changes are signals to exit; otherwise, deteriorating fundamentals will drag down the stock price.

When technical reversal signals appear, such as long black candlesticks, breaking below the 20-day or 60-day moving averages, volume spikes, or divergence in technical indicators (e.g., price making new highs but RSI not following), consider closing.

Due to capital reallocation needs, you may choose to close weaker positions to free up funds for better opportunities, avoiding “stuck in weak stocks and missing strong ones.”

Opening Strategies

Confirm the overall market environment is the first step before opening a position. Prioritize whether the index is above the monthly or quarterly moving averages or in an upward structure (higher highs and higher lows). When the market is bullish, individual stock entries tend to be more successful; in a bearish market, reduce or avoid opening new positions.

Fundamental assessment of individual stocks focuses on profit growth, revenue increase, and industry support (e.g., semiconductors, green energy). Avoid stocks with declining earnings or financial concerns; solid fundamentals reduce unexpected risks after opening.

Technical signals can be used with a “breakout strategy”: when the stock price breaks above consolidation or previous highs with increased volume, it indicates buying interest and can be considered for entry. Avoid “uncertain reversals,” such as sharp declines without breaking previous lows or with decreasing volume. Supporting indicators like MACD bullish cross or RSI exiting oversold zones can help confirm signals.

Pre-risk management requires setting stop-loss points before opening (e.g., 3%-5% below breakout price). Confirm your risk tolerance and determine position size accordingly. Avoid full position entries to prevent excessive impact from single-asset volatility.

Liquidation: The Extreme Risk of Leverage Trading

Liquidation is the most severe risk in futures or leveraged trading because these trades involve borrowing funds (using leverage) to amplify gains. Traders only need a small margin to open a position, but adverse market movements can cause losses to exceed the initial capital instantly.

When losses reduce the account balance below the “maintenance margin,” the exchange or broker issues a margin call. If the trader cannot top up the margin within the deadline, the broker will liquidate the position at market price, resulting in a forced closure—this is liquidation.

Example: Suppose you go long on one mini Taiwan index futures contract with an initial margin of NT$46,000. If the market moves against you and your account loss causes the margin to fall below NT$35,000, you will receive a margin call. If you fail to deposit additional funds, the broker will forcibly close your position.

Liquidation causes a double blow: losing all your capital and potentially incurring debt. Therefore, traders using leverage must have strong risk management skills, set strict stop-loss and take-profit points, monitor the market closely, and adjust strategies timely. If your risk tolerance is limited, the safest approach is to avoid leverage or use very low leverage ratios.

Rollover: Extending Futures Positions

Rollover is a concept unique to futures markets, referring to converting an existing contract into another with a later expiration date. For example, if you buy a December gold futures contract expecting prices to rise but the December contract demand is weak, you can rollover to a January contract to extend your position.

Why rollover? Because futures contracts have fixed expiration dates (e.g., Taiwan index futures expire on the third Wednesday of each month). If you are bullish on the long-term trend and do not want to close your position, you need to rollover to delay settlement.

Cost considerations depend on market spreads. In contango (positive spread), the longer-dated contract is more expensive, so rollover involves selling the near-month and buying the far-month, incurring transaction costs. In backwardation (negative spread), the far-month is cheaper, and rollover may generate a slight gain.

Many domestic and international brokers offer automatic rollover services, but it’s important to understand their rules and costs. Manual rollover allows you to choose the best timing and price but requires market timing skills. If you only trade stocks or forex, rollover is not applicable.

Summary: Core Principles of Position Management

What does closing a position fundamentally mean? It is about taking responsibility for the trading outcome. Effective position management requires setting clear rules based on your strategy, risk tolerance, and market conditions, and strictly executing them. The investment culture in Taiwan favors “steady entry and quick stop-loss,” preferring to miss opportunities rather than blindly chase highs. Once you master concepts like opening, closing, unrealized profit/loss, liquidation, and rollover, you can make more rational decisions in derivatives markets, controlling risks while seizing profit opportunities.