Must-read before trading futures | Opening position, closing position, open interest, liquidation, rollover — understand everything in one go

Futures trading may seem complicated, but at its core, it revolves around five key steps: “Open, Hold, Close, Explode, Roll.” If you don’t understand these concepts, it’s easy to suffer losses in the market. Today, we’ll analyze each from a trader’s perspective.

Understand the Beginning and End of Trading

Opening a position and Closing a position are two ends of trading, and both are indispensable.

Opening a position means you decide to enter the market by buying or selling a certain commodity, stock, or futures contract. At this point, you have a position, but you haven’t yet confirmed profit or loss—because the market is still fluctuating. Only when you close the position (end the trade, sell all or part of it, or buy back) can you lock in the final gains or losses.

For example, you are bullish on Apple stock AAPL, so you buy 100 shares. This is opening a position. Afterwards, the stock price may go up or down, but as long as you hold these 100 shares, your position remains “unclosed.” When you sell all 100 shares, the position is considered closed.

Key point: Only when you close the position can you lock in your profit or loss; before that, everything is just numerical fluctuations.

Unclosed Futures Position: A Key Indicator of Market Momentum

If you’ve paid attention to the futures market, you’ve often heard the terms “Open Interest Increase” or “Open Interest Decrease.” What do these mean?

Open interest refers to the total number of contracts in the futures or options market that have not yet been closed or delivered. It is an important indicator for observing market depth and the strength of bullish or bearish forces.

• Open interest increasing → New funds are continuously entering, indicating increased confidence on one side (bull or bear), and the current trend may continue. For example, when the Taiwan index futures rise, if open interest also increases, it suggests new long positions are entering, and upward momentum is solid.

• Open interest decreasing → Investors are closing positions, and the trend may be approaching a reversal. The market might soon turn or enter consolidation.

Warning signal: If the Taiwan index futures price rises but open interest decreases, it usually indicates that the rally is driven by short covering (forced buy-backs) rather than new longs entering. The upward foundation may be unstable, so watch out for reversal risks.

Explosive Positions: The Most Terrifying Outcome of Leverage Trading

The greatest danger in futures and leveraged trading is liquidation (爆倉).

Liquidation occurs because you used leverage—controlling a large position with a small margin. The advantage is higher multiples of profit, but the downside is amplified losses. When the market moves unfavorably, your account may suffer losses beyond your capacity, prompting the exchange to require additional margin. If you can’t meet the margin call, the system will automatically close your position—that’s liquidation.

Real case: You open a small Taiwan index futures long position with an initial margin of NT$46,000. The market reverses downward, and your account losses grow. When your “Maintenance Margin” drops below NT$35,000, you receive a margin call from your broker. If you cannot top up the margin within the deadline, the broker will forcibly close your position at market price—losses become inevitable.

A worse scenario is if the market fluctuates rapidly, and the closing price is much worse than expected, you may not only lose your principal but also owe money to the broker.

Iron rule to prevent liquidation: Set strict stop-loss points (cut losses at 3%-5%), never hold full positions, and only use leverage you can afford. Many traders get wiped out in one blow due to greed.

Rolling Over: A Unique Futures Tactic for Postponement

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 don’t want to be forced to close at expiration, you need to roll over—convert the expiring contract into the next month’s contract.

Cost considerations for rolling over:

• Contango (Positive Spread): Longer-dated contracts are more expensive than near-term ones. When rolling over, selling low and buying high incurs costs.
• Backwardation (Negative Spread): Longer-dated contracts are cheaper than near-term ones. Rolling over can then potentially earn a spread.

Many brokers in Taiwan offer “automatic rollover” services, but it’s essential to understand the rules and costs. If you prefer to control the timing and price yourself, you can do it manually.

Reminder: Stocks and forex do not have the concept of rolling over; this is unique to futures.

When to Open a Position? Practical Judgment Logic

Opening a position isn’t something to do randomly, or you’ll often get burned. Smart traders follow this logic:

Step 1: Confirm the overall trend
Check if the weighted index is above major moving averages (monthly, quarterly) or in an uptrend structure (higher highs and higher lows). Opening long positions in a bullish environment has a higher success rate than in a bearish one. During downtrends, minimize new entries or only take small positions to test the waters.

Step 2: Fundamental support
Ensure the company’s revenue is steadily growing, financial reports are healthy, and there are industry policy benefits (like semiconductors or green energy). Avoid entering declining stocks or those with financial doubts. Solid fundamentals reduce sudden risks.

Step 3: Technical signals

• Breakout buy signals: Price breaks above consolidation or previous high, with volume increasing (price and volume move together), indicating buying interest—consider following.
• Avoid false reversals: Price drops sharply without breaking previous lows, with declining volume—don’t chase falling knives.
• Additional confirmation: MACD bullish crossover, RSI exiting oversold zone, can serve as secondary signals.

Step 4: Set stop-loss before opening
Before entering, set a stop-loss (e.g., 3%-5% below the buy-in price). Confirm your maximum acceptable loss and adjust position size accordingly. Never go all-in at once to avoid excessive risk.

Trader’s mindset: Taiwan market favors “steady entry, quick stop-loss.” Better to miss some gains than to get caught in a bad position. Perfect entry points don’t exist.

When to Close a Position? Critical Moments That Shouldn’t Be Delayed

The timing of closing determines how much you earn or lose. The following four situations require decisive action:

Achieved target and take profit
Set profit targets before entering (e.g., 10% gain or reaching a moving average). Once hit, take partial profits in stages. Don’t be greedy for more gains. In strong markets, you can leave some positions but always move your take-profit points upward. If the price falls below the 5-day moving average, close all.

Hit stop-loss immediately
Whether it’s a fixed point loss (e.g., 5%) or technical support break, once signals appear, close out ruthlessly. Many Taiwanese traders say “Stop-loss is a must,” because poor risk control ruins even the best strategies.

Fundamental deterioration—don’t hesitate
If the company’s financials are worse than expected or major negative news (like high pledge ratios or policy reversals), close positions even if stop-loss hasn’t been hit. Fundamentals worsening usually accelerates price declines.

Technical reversal signals
Long black candlesticks, price breaking important moving averages (20, 60 days), volume surges or divergence (price hits new highs but RSI doesn’t follow), are all signals to exit. Don’t fight against these indicators.

Need cash? Exit the weakest positions first
If you have better opportunities or need funds, consider closing the weakest positions to improve capital efficiency and avoid long-term holding of poor stocks while missing strong ones.

Ultimate taboo in closing: Greed and hesitation. Set rules and stick to them. Adjust according to your risk appetite and market conditions to protect profits and manage risks.

Final reminder: Taiwan stocks follow a “T+2” settlement system. When you sell (close), the funds are only available after two business days. Plan accordingly. Futures have no such restriction, but leverage and risk management must be more cautious.

Whether stocks, futures, or leveraged trading, the core principles are the same—open the right positions, close the right positions, and stick to stop-loss rules. That’s the long-term winning strategy.