Four Major Concepts of Futures Trading: Understanding the Essence of Closing Positions, Open Interests, Liquidation, and Rollover

Many investors new to the futures market feel confused about terms like Close Position, Open Position, Liquidation, and Roll Over. Understanding these concepts directly impacts trading success or failure. This article will break down these four key terms one by one to help you build correct trading thinking.

Opening and Closing Positions: The Two Ends of the Trading Cycle

The essence of trading can be divided into two stages: Opening is the starting point, and Closing is the settlement endpoint.

When opening a position, you decide to buy or sell a certain asset (such as stocks or futures), but at this moment, the virtual and real are not separated. Your account shows potential gains or losses, but they are not yet realized. Only when you execute a close position—selling or buying back all your holdings—can you lock in the actual profit or loss.

For example, suppose you are bullish on Apple stock AAPL and decide to buy 100 shares at $150 . At this moment, you have opened a position. If the stock price rises to $160, you show a paper profit of $1,000, but this profit is not yet real. Until you sell all 100 shares at $160 , you have not closed the position, and the paper gains are not converted into cash.

The significance of closing a position is far greater than imagined: it not only determines your final profit or loss but also affects return calculations and risk-reward assessments. Mastering the timing and method of closing positions is an important step for traders to advance.

Note: Taiwan stock market adopts a “T+2 settlement” system, meaning the proceeds from selling stocks (closing position) today will only be credited after two business days. Proper fund planning is especially important.

The True Meaning of Unclosed Positions: A Mirror of Market Momentum

Many investors lack understanding of Unclosed Positions. The unclosed position volume refers to the total number of contracts in futures or options markets that have not been offset through hedging or completed via delivery. It is a key indicator of market depth and the strength of bulls and bears.

Signals of increasing unclosed volume: Continuous inflow of new funds into the market, indicating that the current trend (bullish or bearish) is strong and may continue to extend. For example, if the Taiwan index futures rise while unclosed volume also increases, it suggests new buyers are entering, and bullish momentum is solid.

Implications of decreasing unclosed volume: Traders are gradually closing their positions, and the current trend is approaching exhaustion. The market may reverse or enter consolidation.

Key warning: If the Taiwan index futures price rises but unclosed volume shrinks, it indicates that the recent rally mainly relies on short covering (profit-taking by short-sellers), rather than new long positions. The upward momentum is fragile and could reverse at any time. Investors should be alert.

Liquidation: The Ultimate Risk of Leverage Trading

Liquidation usually occurs in futures or leveraged trading. Since these trades require borrowing funds to amplify gains, investors only need to pay a small margin to open a position.

When the market moves against expectations and losses rapidly increase, if the account’s maintenance margin falls below the minimum standard set by the exchange, the broker will issue a margin call. If the investor cannot top up the margin within the deadline, the broker will forcibly close all positions, resulting in liquidation.

Example of liquidation: Suppose you go long on a small Taiwan index futures contract with an initial margin of NT$46,000. If the market moves downward and your losses cause your maintenance margin to fall below NT$35,000, you will receive a margin call. If you cannot immediately deposit more funds, the broker will liquidate your position at market price, causing liquidation.

Liquidation is devastating for investors: not only does the principal disappear, but debt may also be incurred. Therefore, traders using leverage must:

• Establish comprehensive risk management
• Set pre-defined stop-loss and take-profit points
• Continuously monitor market changes
• Choose appropriate leverage ratios (beginners are advised to avoid high leverage)

Roll Over: A Unique Mechanism in Futures Trading

Roll over is a concept unique to futures trading, referring to converting an existing contract into another with a later expiration date.

Futures contracts have fixed expiration dates (e.g., Taiwan index futures expire on the third Wednesday of each month). If you are optimistic about the long-term trend and want to retain your position, you must perform a roll over before the contract expires, transferring your position from the near-month to a far-month contract.

For example, if you hold a December gold futures contract and are bullish on the market, you need to roll over to the January contract before December ends to extend your holding period.

Cost considerations of roll over:

• Contango: When the far-month price is higher than the near-month, rolling over involves selling low and buying high, incurring a cost.
• Backwardation: When the far-month price is lower than the near-month, rolling over involves selling high and buying low, which may generate a profit.

Taiwan investors should note that many brokers offer automatic roll-over services, but it is essential to understand their rules and fee structures. Manual roll-over allows for choosing the most favorable timing and prices.

If you only trade stocks or forex, you do not need to consider roll over; mastering the concepts of open, close, and liquidation is sufficient.

When to Open a Position: Logic for Low-Risk Entry

Deciding when to open a position requires multiple conditions; rushing in blindly often leads to losses.

Market environment assessment: First, confirm whether the weighted index is above moving averages (monthly, quarterly) or shows a rising structure with higher highs and higher lows. In a bullish environment, the probability of profit from individual stock entries is much higher than in a bearish market.

Fundamental analysis: Choose stocks with revenue growth, improved profitability, or benefiting from industry policies (such as semiconductors or green energy). Avoid companies with declining performance or financial concerns. Solid fundamentals reduce the risk of sudden adverse events.

Technical signals validation:

• Breakout signals: Price breaks above consolidation or previous highs, with volume expanding, indicating buying interest—consider following
• Reversal signals: Price drops sharply but does not break previous lows, and volume diminishes—avoid catching falling knives
• Supporting indicators: MACD bullish crossover, RSI exiting oversold zones can serve as confirmation

Risk preset: Before opening a position, set stop-loss points (e.g., 3-5% below the purchase price), ensuring you can tolerate the potential loss. Decide on position size accordingly. Avoid full position entries to prevent excessive risk from a single asset.

When to Close a Position: A Framework for Profit Protection

Timing of closing positions is equally important. Wrong decisions can turn gains into losses or lead to premature profit-taking.

Profit target-based closing: Set profit goals before entering (e.g., 10% gain or reaching a specific moving average). Once achieved, consider partial profit-taking. In strong trends, retain some positions but adjust take-profit points (e.g., close immediately if price falls below the 5-day moving average).

Stop-loss enforcement: Whether fixed (e.g., cut loss at 5%) or technical (e.g., break support levels or moving averages), execute immediately when triggered. Taiwanese investors often say “Stop-loss is the basic credit of investing”; execution determines risk control effectiveness.

Fundamental deterioration: If the stock shows poor earnings reports or major negative news (e.g., high pledge ratios, policy reversals), close even if the stop-loss has not been hit, to avoid fundamental collapse and sharp declines.

Technical reversal signals: Long black candlesticks, price breaking important moving averages (20-day, 60-day), volume spikes, or divergence indicators (price making new highs but RSI not following) should be viewed as signals to close.

Capital reallocation needs: If better opportunities arise or funds need to be reallocated, close weaker positions to optimize capital deployment.

Core rule for closing: Establish clear entry and exit rules, and strictly follow them. Greed and hesitation are enemies of proper closing decisions. Setting rules based on risk tolerance and market conditions helps preserve profits and control risks.