Core concepts in futures trading: opening position, closing position, unrealized position, liquidation, and rollover explained in detail

In the futures market or leverage trading, investors often encounter terms such as Open Position, Close Position, Unclosed Position, Liquidation, Roll Over. Although these concepts may sound complex, understanding them is crucial for trading decisions. This article will break down each one to help you build a comprehensive trading understanding.

Meaning of Opening and Closing Positions: The Start and End of Trading

Trading can be divided into two core stages: Opening a position is the initiation of a trade, and Closing a position is the conclusion of a trade.

Opening a position means you have a judgment on the market direction and start establishing a position. At this point, you hold a position but have not yet locked in profit or loss — as long as the position remains open, everything is still a floating possibility.

Brief explanation of closing a position: It involves executing an opposite trade to end the position and determine the final profit or loss. For example, if you buy Apple stock AAPL and hold it, when you decide to sell all shares, you complete the closing action. Only after closing the position will the gains or losses become the “real numbers.”

The fundamental difference between the two is that opening a position involves risk-taking, while closing a position involves risk resolution. A trading cycle necessarily follows the sequence “Open → Hold → Close.”

It is worth noting that the Taiwan stock market adopts a “T+2 settlement system,” meaning that funds from today’s closing will be credited after two business days. Adequate time should be reserved for capital planning.

Unclosed Position Volume: A Barometer of Market Depth

Unclosed position volume in futures or options markets refers to the total number of contracts that have not been settled through an opposite trade or delivery. This indicator reflects the market’s bullish and bearish momentum and trend strength.

An increase in unclosed position volume usually indicates continuous inflow of new funds, supporting the current trend (regardless of direction). For example, in the Taiwan index futures during an upward trend, if the unclosed volume also increases, it suggests that bullish participants are continuously entering, making the upward foundation more solid.

A decrease in unclosed position volume implies investors are closing their positions, and the current trend may be nearing a peak, with potential risks of reversal or consolidation.

Special warning: If the Taiwan index futures price rises while the unclosed volume decreases, it may indicate that the recent rally is mainly driven by short covering rather than new long positions, suggesting the upward momentum may lack a solid foundation.

Causes and Risks of Liquidation

Liquidation phenomena occur specifically in futures or leveraged trading. Investors use a small amount of margin to control multiple times the capital, and if the market moves against their position, losses can quickly erode the margin. When the account’s margin falls below the maintenance margin, the exchange or broker will issue a margin call. If the investor cannot top up within the deadline, the platform will forcibly close the position — this is liquidation.

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 against you and your account’s loss reduces the margin below NT$35,000, the broker will issue a margin call. If you cannot make up the shortfall, your position will be liquidated at market price, resulting in a liquidation.

Liquidation can be devastating — not only losing all principal but potentially incurring debt. Therefore, traders using leverage must have strict stop-loss discipline and sound risk management skills. It is recommended to set clear stop-loss and take-profit points to avoid emotional trading. If unsure, it is better to refrain from using leverage or to adopt very low leverage ratios.

Roll Over: A Unique Futures Strategy for Extending Positions

Roll over is exclusive to futures trading. The concept involves converting a near-month contract into a longer-term contract to extend the holding period.

For example: You buy December gold futures, optimistic about the market, but find that demand in December is weak and expect prices to be pressured. You can then roll over to the January contract to continue your bullish position.

Why is roll over necessary? 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 but do not want to exit, roll over is the only way to continue trading.

Cost considerations for roll over:

• Contango: When the distant month price is higher than the nearby month, rolling over involves “selling low and buying high,” incurring costs.
• Backwardation: When the distant month price is lower than the nearby month, rolling over “selling high and buying low” can generate gains.

Many domestic and international brokers offer “automatic roll-over” services, but it is important to understand their rules and costs. Manual roll-over allows you to choose the best timing and price.

When to Open a Position: Grasp the Entry Timing

Deciding when to open a position should be based on four key factors:

1. Confirm the overall market trend: Prioritize checking if the index is above moving averages (e.g., monthly, quarterly) or in an upward structure (higher highs and higher lows). In a bullish environment, individual stock entries have higher success rates; during bearish periods, reduce positions or pause opening.

2. Fundamental analysis of individual stocks: Focus on profit growth, revenue increase, industry policy support, etc. Avoid stocks with declining performance or financial concerns. Solid fundamentals help reduce sudden risks.

3. Technical signals validation:

• Breakout entries: Price breaks above consolidation or previous high with increased volume, indicating buying interest.
• Avoiding false reversals: Do not open positions on stocks that drop sharply without breaking previous lows or with declining volume.
• Supporting indicators: MACD golden cross, RSI exiting oversold zones, can confirm buy signals.

4. Pre-emptive risk control: Before opening, set stop-loss points (e.g., 3%-5% below breakout price), and determine position size based on acceptable loss levels. Avoid full positions; risk on a single stock should not be excessive.

Golden rule for opening positions: “Follow the trend of the big environment, ensure individual stocks have support, signals are clear, and risks are well managed.” Taiwanese investors tend to prefer “steady entry and quick stop-loss,” even if it means missing some opportunities rather than buying recklessly.

When to Close a Position: Discipline in Realizing Gains and Managing Risks

Timing for closing positions should follow three main principles: Follow the trend, cut losses early, and take profits without greed.

1. When profit targets are reached: Set profit-taking points before entering (e.g., 10% gain or reaching a specific moving average). Once achieved, gradually close parts of the position to lock in gains, avoiding regret of “profit turning into loss.” In strong trends, you may retain some positions but adjust take-profit points accordingly, such as closing if the price falls below the 5-day moving average.

2. When stop-loss levels are hit: Whether using a fixed point (e.g., 5% loss) or technical support levels (e.g., breaking support or moving averages), once triggered, execute decisively. This is a fundamental aspect of investing discipline.

3. When the fundamental outlook worsens: If the stock shows poor earnings, unexpected negative news (e.g., large pledge of shares by directors, policy shifts), even if stop-loss levels are not reached, it is prudent to exit to avoid a fundamental collapse.

4. When technical reversal signals appear: Long black candlesticks, breaking key moving averages (20-day, 60-day), volume spikes, or divergence indicators (price making new highs while RSI does not) are warning signs to close.

5. When capital reallocation is needed: If better investment opportunities arise or funds need to be reallocated, it is wise to close weaker positions to improve capital efficiency and avoid being “stuck in weak stocks and missing strong ones.”

Winning mindset for closing: Overcome greed and hesitation, strictly follow preset rules. Setting reasonable profit and stop-loss points and sticking to them, regardless of market fluctuations, is essential to truly protect gains and control risks.