Opening position, closing position, open interest, liquidation, transfer of position: A comprehensive analysis of five key futures concepts and practical trading guide

In the futures market and leverage trading, investors must grasp five core concepts—Open Position, Close Position, Open Interest, Liquidation, and Roll Over. These terms may seem complex, but understanding them is crucial for avoiding losses and increasing winning rates.

Open and Close Positions: The Starting and Ending Points of Trading

Opening a position is the start of a trade, where you buy or sell a certain asset, expecting the price to move favorably. However, at the moment of opening, you haven’t confirmed profit or loss—only when you close the position will gains or losses be finalized.

Closing a position signifies the end of a trade. Whether it’s stocks, futures, or other assets, as long as you decide to liquidate your holdings, it’s called closing the position. Only after closing can you accurately calculate returns, loss margins, and risk-reward ratios.

For example, suppose you are bullish on Apple stock (AAPL), and buy 100 shares at $150 . During holding, you can add or reduce your position, but as long as you still hold, the position remains open. When Apple’s stock price rises to $160 , you decide to sell all, completing a full trade—closing a long position.

The importance of closing positions lies in: it directly affects your trading results. Closing too early may miss subsequent gains; closing too late might lead to reversals. Smart traders execute closing based on preset rules rather than feelings.

Note: Taiwan stocks adopt a “T+2 settlement” system, meaning funds from today’s closing will be credited after two business days, so plan your capital accordingly.

Open Interest: A Barometer of Market Depth

Open interest refers to the total number of contracts in futures or options markets that have not been offset through opposite trades or settled. It is an important indicator for judging market bullish or bearish momentum.

Increase in open interest indicates: new capital is continuously entering, and the current trend (bullish or bearish) may continue. For example, in Taiwan index futures, if prices rise and open interest also increases, it suggests strong bullish momentum and solid buying.

Decrease in open interest indicates: investors are closing their positions, the current trend is nearing its end, and the market may reverse or enter consolidation.

Warning signals: If the Taiwan index futures price rises but open interest declines, it may imply that the rally is mainly driven by short covering (buying back to close positions) rather than new long entries. This kind of rally is unstable and may face correction later.

Liquidation: The Biggest Risk in Leverage Trading

Liquidation is a phenomenon unique to leveraged trading. Since futures and leverage trading use margin systems, you only need to deposit a small amount of margin to control a larger position. When the market moves against you, losses can quickly wipe out your entire margin, even exceeding your principal.

At this point, the exchange or broker will require investors to add margin (Margin Call). If the investor cannot meet the margin requirement within the deadline, the platform will forcibly close your position—that’s liquidation.

Real-world example of liquidation:

Suppose you go long on a mini Taiwan index futures contract, with an initial margin of NT$46,000. If the market moves downward and your account loss causes your maintenance margin to fall below NT$35,000, the broker will send a margin call, demanding you to top up. If you fail to do so within the specified time, the broker will liquidate your position at market price—this is liquidation.

The consequences of liquidation are severe:

• Loss of all principal
• Potential owing of large debts
• Account frozen, unable to trade further

How to prevent liquidation:

• Use moderate leverage (beginners are advised not to exceed 2x)
• Set strict stop-loss points (e.g., close position if loss reaches 5% of principal)
• Maintain sufficient account balance, avoid over-leverage
• Monitor market volatility closely

Roll Over: The Strategy of Changing Contracts in Futures Trading

Roll over is a concept unique to futures, referring to converting held contracts into another with a different expiration date.

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 exit, you need to roll over to extend the trading period.

Example scenario:

You buy December gold futures, expecting gold prices to rise. As December approaches, you find the demand for December contracts is weak, and gold may face downward pressure. You can roll over by exchanging the December contract for the January contract, prolonging the trading cycle.

Cost considerations in roll over:

• Contango (Positive Spread): Longer-term prices > Near-term prices. Rolling over involves selling low and buying high, incurring costs.
• Backwardation (Negative Spread): Longer-term prices < Near-term prices. Rolling over may generate gains by selling high and buying low.

Methods of roll over:

• Automatic rollover: Many brokers offer this service, but you should understand their rules and fees beforehand.
• Manual rollover: Choose the best timing and price yourself, more flexible but requires active management.

If you only trade stocks or forex, understanding roll over is unnecessary, but mastering closing, open interest, and liquidation is essential.

Practical Trading: Timing of Opening and Closing Positions

Opening and closing are core trading decisions; executing them well directly determines your final profit or loss.

Four key criteria for timing opening positions

1. Confirm the overall market trend

Prioritize whether the weighted index is above moving averages (monthly, quarterly) or in an upward structure (higher highs and higher lows). When the market is bullish, individual stock entries have higher profit potential; in a bearish market, open positions sparingly or reduce size.

2. Fundamental analysis of individual stocks

Focus on whether the stock has profit growth, revenue increase, or industry support (e.g., semiconductors, green energy). Avoid stocks with declining earnings or financial concerns. Solid fundamentals reduce unexpected risks after opening.

3. Technical signals verification

• Breakout signals: Price surpasses consolidation or previous high, with volume expansion (price-volume sync), indicating buying interest—consider following
• Avoid false breakouts: Sharp drops without breaking previous lows, with declining volume, are likely traps
• Indicators: MACD bullish crossover, RSI exiting oversold zone, can confirm entry signals

4. Pre-emptive risk control

Set stop-loss points before opening (e.g., 3-5% below breakout price), ensuring you can tolerate the loss. Decide position size accordingly. Avoid full position at once to prevent excessive risk from a single asset.

Golden rule for opening: “Follow the trend, stocks with support, clear signals, and risk controls.” Taiwan market prefers “steady entry and quick stop-loss”; better to miss a trade than to enter recklessly.

Five major criteria for timing closing positions

1. Achieve preset profit target

Set profit-taking points before entry (e.g., 10% gain or reaching a specific moving average). Close in stages once targets are hit to avoid turning gains into losses. In strong markets, retain part of the position but adjust take-profit points (e.g., close if price falls below 5-day moving average).

2. Hit stop-loss

Whether using a fixed point stop-loss (e.g., 5% loss) or technical stop-loss (break support levels or moving averages), act decisively when triggered. Taiwanese investors often say “Stop-loss is the basic credit of investing”; delaying only enlarges losses.

3. Deterioration of fundamentals

If the stock’s financials turn worse or major negative news occurs (e.g., high pledge ratios, policy shifts), close even if stop-loss hasn’t been reached. Fundamentals worsening often cause sharp declines, and holding through is risky.

4. Technical reversal signals

• Long black candlestick
• Price breaks important moving averages (20-day, 60-day)
• Volume spikes downward
• Divergence in indicators (price hits new highs but RSI does not follow)

These are warning signs to close. Taiwanese retail investors often rely on technical signals; these should be taken seriously.

5. Capital reallocation needs

If better investment opportunities arise or funds need to be reallocated, consider closing weaker positions to improve capital efficiency. Avoid being “stuck in weak stocks and missing strong ones.”

The biggest enemies of closing are greed and hesitation. Strictly follow preset rules; do not change plans due to short-term fluctuations. This discipline helps preserve profits and control risks.

Summary: The Complete Trading Process from Opening to Roll Over

• Open Position: Rational decision based on trend, fundamentals, and technical signals
• Close Position: Decisive execution based on profit targets, stop-loss, and fundamental changes
• Open Interest: An important indicator of market strength
• Liquidation: The greatest risk in leverage trading, requiring careful leverage management
• Roll Over: Essential skill for long-term futures traders, understanding cost structure

Whether stocks or futures, mastering these five concepts, setting clear rules, and strictly executing discipline are the foundation of stable profits.