Close Position: Definition, How It Works in Trading, and Example

In simplest terms, closing a position in trading means to terminate or exit an existing trade. When a trader decides to close a position, they are essentially taking action to finalize their trade and exit the market. This action could be motivated by various factors, such as achieving a profit target, stop loss being triggered, or simply taking a position off the market for other strategic reasons. Closing a position refers to executing a security transaction that is the exact opposite of an open position, thereby nullifying it and eliminating the initial exposure.

  1. But on the rough terrain of illiquidity, where thinly traded stocks hold sway, larger orders can stumble, tripping over wider bid-ask spreads and potentially taking a tumble on their returns.
  2. These are indirect positions since they do not involve outright positions in the actual underlying.
  3. 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.
  4. A financial professional will offer guidance based on the information provided and offer a no-obligation call to better understand your situation.

Deciding the right time to exit a position is nuanced, shaped by various market factors and signals. Traders balance these elements, reflecting on market dynamics and personal strategy. Hence, closing a position means completing a security transaction that is the exact opposite of an open position. However, to profit from a trade, you must understand how you can properly close a position. Filip is an experienced search engine optimization writer with a demonstrated history of working in the marketing and advertising industry.

Example of a Closed Position

Our team of reviewers are established professionals with decades of experience in areas of personal finance and hold many advanced degrees and certifications. The articles and research support materials available on this site are educational and are not intended to be investment or tax advice. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. 11 Financial is a registered investment adviser located in Lufkin, Texas. 11 Financial may only transact business in those states in which it is registered, or qualifies for an exemption or exclusion from registration requirements. Closing a position varies slightly depending on the market where the trade was made.

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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. If the security is illiquid, the investor may not be able to close all his positions at once at the limit price specified. Also, an investor may purposely close only a portion of his position. For example, a crypto trader that has an open position on three XBT (token for Bitcoin), may close his position on only one token. To do this, he will enter a sell order for one XBT, leaving him with two open positions on the cryptocurrency. There is a nuanced difference between a buy-to-close option and a buy-to-cover purchase.

It’s a conductor’s baton, subtly influencing the entire portfolio’s harmony and shaping its grand performance. To close the position, the trader submits an order to sell the XYZ stock at the current market price of $60. Once the order is executed, the position is closed, and the trader realizes a profit of $10 per share.

Generally, closing positions are executed at the discretion of traders. However, in special cases, positions are sometimes closed by force or involuntarily. I take a long position on stock X and am waiting for the price to increase twice the original price. I close the position Alligator indicator (terminate the investment) after the price touches my expected value, by selling the stock (transaction of security). 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.

These are sophisticated allies that execute trades based on a mix of set criteria, encompassing not just price but also a slew of technical indicators and market conditions. For those juggling multiple positions or navigating fast-moving markets, these systems are invaluable, ensuring precise and timely execution of exit strategies. Remember, the decision to close a position is a delicate balance of market analysis, personal financial goals, and risk tolerance. It’s an artful step in the dance of trading, shaping your overall investment journey. 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.

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This is because the trade is live and can still make profits or incur losses. In a long position, closing a position would mean selling the security. For instance, features like “take profit orders” and stop-loss will automatically close your position if a market’s price rises or drops to a set level.

Positions can be either speculative, risk-reducing, or the natural consequence of a particular business. For instance, a currency speculator can buy British pounds sterling on the assumption that they will appreciate in value, and that is considered a speculative position. However, a U.S. business that trades with the United Kingdom may be paid in pounds sterling, giving it a natural long forex position on pounds sterling. By following these necessary steps, you can ensure that you are making well-informed decisions that align with your financial goals and strategies. On the other hand, a closed position is a trade that is no longer active and has been terminated by a trader. Similarly, a short position may be subject to termination (buy-in) in the event of a short squeeze, an event where there is a sudden rise in stock prices.

Profits and losses, crystallized, impact your portfolio’s balance, a symphony of gains and pains. Released capital dances to a new rhythm, seeking fresh opportunities or realigning with your strategic vision. This rhythm, practiced with discipline, ensures your trading journey remains true to its long-term melody. Just as NKE crested the $129 wave, whispers of global economic woes rippled through the market, hinting at potential turbulence in the retail sector. Instead of clinging to the $130 target, the investor deftly steered the ship, securing their position at $129, pocketing a handsome profit even if it fell short of the initial goal.

For example, a sudden dip in a steadily climbing stock might prompt a position closure to protect gains or minimize losses. Suppose a trader opens a long position in XYZ stock at $50 per share. They believe the stock price will increase and want to profit from this potential rise. After a few weeks, the stock price reaches $60 per share, and the trader decides to close their position to lock in their profits. Suppose an investor has taken a long position on stock ABC and is expecting its price to increase 1.5 times from the date of his investment.

For example, a trader might close a position once it has reached a specific profit target. The key lies in a harmonious blend of market analysis, economic whispers, and unwavering alignment with your trading blueprint. Achieving perfect timing, like mastering any art form, takes practice and dedication. But fear not, for a multitude of established strategies and signals stand as your guide, helping you navigate the intricacies of this financial ballet. The ripples of closing a position reach far beyond the single trade. It’s about safeguarding your portfolio’s health, keeping your risk appetite in line, and setting the course for future moves.

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