What Is Closing a Position?
The term closing a position is frequently mentioned in stock futures, options, or cryptocurrency trading. In simple terms, it means ending an open trading position.
So, does closing a position equate to selling? Not entirely.
Trading generally involves going long (buying) or short (selling). Since closing a position means ending a trade, the action differs based on the scenario:
- Going Long: Profits are made by buying low and selling high. Investors first buy to go long, so closing the position later involves selling.
- Going Short: Profits are made by selling high and buying low. Investors first sell to go short, so closing the position later involves buying.
Related Read: What Are Long and Short Positions? Learn This Trick to Avoid Getting Squeezed!
Types of Closing Positions
Generally, closing positions falls into three categories:
Active Closing
Investors decide when to close their positions. This could be based on market conditions or predefined orders. Examples:
- Buying BTC at $80,000 (long position), then manually closing the position at $100,000 to lock in profits.
- Setting a stop-loss at $72,000 for the same position, leading to automatic closing if BTC drops to that level.
Whether manual or automatic, if executed per the investor’s plan, it qualifies as active closing.
Passive Closing (Forced Liquidation)
In crypto futures trading, if losses exceed the maintenance margin, the system forcibly closes the position. Since investors risk losing their entire margin, this is also called liquidation.
Example:
An investor uses $500 as margin for a **5x leveraged long position** on BTC at $100,000.
- If BTC drops 10%:
The floating loss is 50% (10% × 5), totaling $250. No liquidation yet. - If BTC drops 20%:
Theoretically, the loss would be 100% (20% × 5), wiping out the margin. However, exchanges often force-close earlier (e.g., at 80% loss) to prevent excessive risk.
👉 Read more about liquidation risks
Automatic Closing Upon Expiry
Contracts like futures and options have expiry dates. Once expired, positions are automatically closed and settled.
Investors can roll over positions by opening new contracts with later expiry dates—this is called position transfer.
Risks & Considerations When Closing
Despite being a routine trading action, closing positions carries risks:
Slippage Risk
In volatile or illiquid markets, execution prices may differ from expected levels (e.g., closing at $98 instead of $100).
Failure to Close
Situations where investors can't exit trades include:
- Low liquidity markets (few buyers/sellers, e.g., illiquid stocks or altcoins).
- Market halts (e.g., stock market circuit breakers or extreme volatility).
- Exchange outages (e.g., crypto exchanges crashing during extreme downturns).
- Account restrictions (e.g., delisted assets or frozen accounts).
When Should You Close a Position?
Nobody can predict markets perfectly, but common closing triggers include:
✔ Hitting target prices (e.g., selling when a stock reaches projected profit levels).
✔ Stop-loss execution (to limit losses per trading strategy).
✔ Fundamental shifts (e.g., adverse news, market crashes).
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Conclusion
Trading success isn’t just about entering—it’s about exiting smartly. Understanding when and how to close positions helps traders manage risks and secure profits.
FAQs
Q1: Is closing a position the same as selling?
No. Closing means ending a trade, which could involve buying (for short positions) or selling (for long positions).
Q2: Why does forced liquidation happen?
When losses exceed margin requirements, exchanges forcibly close positions to prevent further losses.
Q3: How can I avoid liquidation risks?
- Use lower leverage.
- Monitor margin levels closely.
- Set stop-loss orders.
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