Close Positions in Trading: Everything You Need to Know

Understanding trading as a beginner requires learning the basics first, and there's no better way to start than with opening and closing positions. Namely, all instruments in the market move in price, and the asset's price is represented on a chart. This asset can grow in price, leading to the chart going up, or it can fall, leading to the chart going down.

Of course, traders can get potential profit from the market regardless of the chart's direction. Namely, a trader can open a long position, where you expect the price to go up, or a short position, where you expect it to go down—opening a sell trade to get potential profit from the price going down.

However, to profit from a trade, you must understand how you can properly close a position. So, let's see what closing a position means in more detail.

What Is a Close Position in Trading?

Simply put, closing a position in trading means exiting an open trade and taking profits or losses accordingly. This can be done either manually if the trader is tracking their trades closely, or automatically with the help of stop-loss orders that could limit the risks on both long and short trades.

It's worth mentioning that there are many reasons why a trader would close a position. These include:

• Taking profits from an open long or short position.
• Mitigating a potential loss, anticipating that the market is headed in the opposite direction.
• Preventing forced liquidation by the market or your brokerage.
• Adding liquidity to your account for a bigger position.

Short Selling

Short selling involves opening a position in an instrument with the expectation that it will fall in price, and closing it to take potential profits. To short sell, you first artificially "borrow" shares from your brokerage to open the position. When the time comes to close this position, you "return" these borrowed shares back to the brokerage, and any profits or losses are calculated accordingly.

Exiting a Long Position

The most common type of position is a long position, where you open a buy trade with the expectation that it will rise in price and close it to earn a potential profit in the price difference. To close such a position, the trader "exits" the market by reversing their trade, effectively selling the asset back to the brokerage at the current market price and earning potential profits.

Exemptions

In some cases, traders are not required to close their position. This can happen if the instrument they used is subject to an expiration date, as with derivatives such as futures or options contracts. In these cases, the position is automatically closed when it reaches its predetermined expiration date, regardless of whether or not the trader would like to close it.

It's also worth mentioning that, in some cases, positions aren't closed voluntarily but forcefully by the brokerage or the market. This can happen due to improper risk management or extremely volatile market conditions.

The most common type of a force-close position is with a margin call, which is a demand by the brokerage to invest more cash or close the position. Failing to deposit more cash in your account when margin-called might cause a forced liquidation to happen in your account, making you close your positions with a loss.

» Read more about the differences between CFD and futures trading

Closed Position Example

Let's say a trader opens a long position on the price of Microsoft stock (MSFT), which is currently trading at $250 per share. After two days, the price of the stock rises to $255, and the trader decides that it's time to take potential profits, so they close their position. This action will result in the trader making a profit of $5 per share invested.

Let's explain this example in a step-by-step:

• The trader sees a chance to potentially profit from the price of MSFT stock, anticipating that the share price will go up after a certain event (like Microsoft releasing a new product).
• Then, the trader opens a long position with their brokerage (where you buy low and sell high) and waits for an increase in price.
• Once the share price reaches the trader's expectations (for example, $255), the trader closes the position and takes the potential profits.

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Final Words

To summarize, closing positions refers to exiting an open trade and taking profits or losses accordingly. As you can see, positions can be closed either voluntarily or forcefully by the brokerage/market. This decision is based on multiple factors, like the trader's risk tolerance, current market conditions, as well as potential earning opportunities.

Whether you're in a long or a short position, learning how to close positions properly is essential.