What do liquidation, closing, open positions, and transferring positions mean? The four core concepts every futures trader must understand

Many people new to futures or leveraged trading often hear terms like “close position,” “unrealized profit/loss,” “liquidation,” and “rollover,” but they often don’t understand what these mean. These concepts are not only fundamental knowledge that traders must grasp but also directly relate to your fund safety. Today, let’s unravel these terms together to help you make smarter trading decisions.

Understanding the Start and End of Trading: How to Interpret Opening and Closing Positions

Trading is like opening and closing a door—opening a position is like opening a door to trading, closing it is like shutting it. When you decide to buy or sell stocks, futures, or other assets, you’re “opening a position.” At this point, you hold a position, but your profit or loss is still floating, not yet realized.

Conversely, closing a position means ending your holding, selling all or part of your position, and only then can you confirm your actual profit or loss. Only after closing can your trading result be definitively “profitable” or “loss-making.”

For example, suppose you are bullish on Apple (AAPL), buy 100 shares at $150. You have opened a position. At this stage, you have unrealized gains or losses, but the trade isn’t finished. When the stock rises to $160 and you decide to sell all, that is closing the position—your trade concludes, and you realize a profit of $1,000.

Key differences between opening and closing a position:

• Open position = trade starts, holding a position, profit/loss is floating
• Close position = trade ends, position is exited, profit/loss is realized

Reminder: In Taiwan’s stock market, a “T+2 settlement” applies, meaning if you sell stocks (close a position) today, the funds will only be credited after two business days. Plan your funds accordingly.

Unclosed Position (Unrealized Volume) Reflects Market Sentiment

If closing a position is a personal decision, then unclosed volume (open interest) is like a thermometer of the entire market’s mood.

Unclosed volume refers to the total number of contracts in futures or options that have not been offset by an opposite transaction or settled. It reflects not just a number but the collective outlook of market participants.

What does increasing unclosed volume mean? New funds keep flowing into the market, and the current trend (bullish or bearish) may continue to intensify. For example, if the Taiwan index futures are rising and unclosed volume is also increasing, it usually indicates persistent buying pressure and strong bullish momentum.

What about decreasing unclosed volume? Investors are closing their positions, and market momentum may be waning, signaling potential reversal or consolidation.

The most dangerous scenario: Price rises while unclosed volume declines. This suggests the rally is mainly driven by short covering (short sellers buying back), not new buying interest. Such upward moves are unstable and could reverse at any time.

Liquidation Means Forced Closure—Why Does It Happen?

This is one of the most feared situations for traders. Liquidation means your account is forcibly closed out by your broker or exchange due to adverse market movements, also called “forced liquidation” or “systematic clearing.”

Liquidation occurs mainly because of the dual-edged nature of leverage.

When you use leverage, a small amount of margin controls a large position. For example, a single Taiwan futures contract might require about NT$46,000 in margin. Leverage amplifies both gains and losses.

How does liquidation work?

1. You open a position with a set margin—say NT$46,000 (initial margin)
2. Market moves against you—your position starts losing money
3. Your account balance drops, and margin falls below maintenance margin—say NT$35,000
4. Margin call issued—broker demands you deposit more funds
5. You fail to meet the margin call—no additional funds or response
6. Broker forcibly closes your position at market price—liquidation occurs

Example: If the Taiwan index drops 500 points (about 50 points × 10 times leverage), your long position loses NT$5,000. If the decline continues, losses escalate rapidly. When your account’s loss exceeds NT$10,000, and the margin falls below the required level, the system automatically triggers liquidation, and you lose your entire margin.

Real impact of liquidation:

• Total loss of your principal
• Possible debt if losses exceed your deposit
• Psychological trauma
• Difficulty obtaining future financing

This is why risk management is considered the first lesson in trading.

Rollover in Futures Contracts—A Must-Know for Long-Term Traders

Futures are not like stocks, which can be held indefinitely. Each futures contract has a fixed expiration date (e.g., Taiwan index futures expire on the third Wednesday of the month). Rollover means transferring your position from the near-month contract to a farther-month contract as expiration approaches.

Suppose you are bullish on gold futures for December. As mid-November approaches, the December contract nears expiry. You can’t just hold the position to expiration and settle physically; you need to roll over. You can sell the December contract and buy the January contract to maintain your long position.

Why rollover?

1. Avoid forced physical delivery at expiration
2. Maintain continuous exposure aligned with your long-term view
3. Liquidity considerations—farther-month contracts often have better liquidity and narrower spreads

Cost and profit considerations:

• Contango (Positive spread): Future price > spot price. Rollover involves selling low and buying high, incurring costs.
• Backwardation (Negative spread): Future price < spot price. Rollover can be profitable.

Options for rollover:

• Automatic rollover services offered by brokers—be sure to understand their rules and costs
• Manual rollover—you choose the timing and price, more flexible but requires active monitoring

Note: If you’re only trading stocks or forex, you don’t need to worry about rollover; it’s specific to futures trading.

Three Essential Checks Before Opening a Position

Deciding to open a position may seem simple, but it requires careful consideration. Don’t open just because an opportunity appears; ensure the following conditions are met:

Check 1: Is the overall market bullish or bearish?

Prioritize confirming that the Taiwan index is above its monthly or quarterly moving averages, or in an upward structure with higher highs and higher lows. When the market is in a bullish environment, individual stock entries are more likely to be profitable; in a bearish market, it’s better to hold back or reduce positions.

This is “trending with the trend”—don’t open positions against the prevailing trend.

Check 2: Does the stock itself have support?

Look for companies with profit growth, increasing revenue, or benefiting from industry policies (e.g., semiconductors, green energy). Avoid stocks with declining earnings, financial concerns, or negative news. Fundamentally sound stocks, even with short-term volatility, tend to have better long-term prospects.

Check 3: Are there clear technical signals?

Common entry signals include:

• Breakouts—price surpasses consolidation or previous high with increased volume, indicating new buying interest
• Indicators—MACD bullish crossover, RSI exiting oversold zone, confirming momentum
• Avoid false signals—price not breaking previous lows or volume shrinking without support

Final step: Set a stop-loss

Before clicking “buy,” decide your exit point. For example, if the price drops 3-5% below your entry or breaks a key support level, exit. This protects your capital and prevents small mistakes from turning into big losses.

In Taiwan, the consensus is “better to miss an opportunity than to buy recklessly.” Focus on risk control rather than chasing perfect entries.

When to Close a Position: Five Situations You Must Know

Opening a position is easy; closing it profitably is harder. Many know when to buy but not when to sell. Here are five situations indicating it’s time to close:

Situation 1: Reached your profit target

Set specific goals before entering—e.g., 10% gain, crossing a moving average, or hitting a certain price like $150. Once achieved, consider partial or full profit-taking. If the trend remains strong, you can leave some position but adjust your stop-loss (e.g., close all if it falls below the 5-day moving average).

Greed is the enemy—“profit turns into loss” often happens here.

Situation 2: Loss has hit your stop-loss

Whether it’s a fixed point loss (e.g., 5%) or technical support break, once the condition is met, exit decisively.

Taiwanese investors often say “stop-loss is the basic investment skill.” Quick acknowledgment of losses prolongs survival.

Situation 3: Fundamental deterioration

Even if not at stop-loss, if the company reports worse-than-expected earnings, faces major negative news (e.g., high pledge ratios), or industry policies shift, prioritize closing. Deteriorating fundamentals often lead to sharp declines.

Situation 4: Technical warning signs

Signs include:

• Long black candlesticks or breakdown below key moving averages (20, 60 days)
• Volume spikes on down days
• Divergences—price making new highs but RSI not confirming These are common signals among retail traders for exiting.

Situation 5: Better opportunities elsewhere

If you find stronger stocks or need to free funds for other investments, consider closing weaker positions. This isn’t giving up but optimizing capital efficiency.

Golden rule for closing:

Avoid greed and hesitation. Before entering, set clear rules; once in, stick to them—whether taking profits or cutting losses. Only disciplined execution preserves gains and controls risks.

Remember, closing a position is more important than opening one. Opening determines potential profit; closing determines your actual gains.