What is an Open Position?

Image Image

An open position is a trade that has begun but has not yet concluded with a corresponding trade. When an investor holds onto 300 shares of a stock, they maintain an open position in that stock until they decide to sell it. As someone experienced in the world of finance, your success relies on the careful use of a wide array of financial tools and strategies.

Let’s look at what it means to have a position open in the market and how you can harness its potential to achieve your trading goals. What is an open position? We look at the meaning and risks in trading.

What Is an Open Position in trading?

When you initiate a trade in the market, you establish an open position. Until you execute a trade of equal and opposite value, also known as a 'close position', or until an option or futures contract expires, this position remains active.

Having an open position entails having a contract in a financial instrument, and any fluctuations in that instrument's price will result in either gains or losses until you choose to close the trade.

When a trader holds onto their purchased assets for a certain period of time, they do so with the expectation that the selling price will increase. When it comes to leveraged trading, long positions involve speculating on the asset price increasing without actually owning the underlying asset.

Traders predict a decline in the market with a short open position, traders anticipate a market decline. Traders have the opportunity to acquire assets from brokers and subsequently sell them on the market. Later, the trader has the option to repurchase the stocks or equities and sell them back to the broker, potentially earning a profit if the stock's price has decreased.

When it comes to leveraged trading, a short trade involves a trader speculating that the price of an asset will decrease. Having an open position enables traders to capitalise on market movements and potentially generate profits as asset prices change.

How to open a Forex position?

Before making a decision to enter a forex trade, it's important to thoroughly understand the mechanics of market exposure and familiarise yourself with a few trading strategies. Forex trading can be quite complex, so it's crucial to be well-prepared. Therefore, you will gain a clear understanding of the key factors that are advantageous when entering a trade.

Now, let's move on to establishing the entry rules. Two types of orders exist: market orders and pending orders.

When you execute a market order, you open positions at the most favourable price. In terms of psychology, it is more comforting when compared to pending orders. Placing a market order will expose you to the market.

A pending order is awaiting confirmation due to a delay in processing your trading order. We anticipate favourable market conditions to emerge. There are two types of pending orders: stop orders and limit orders.

  • Stop orders

They align with the anticipated price movement. To place a buy-stop order, it is important to set the price above the current market value. After that, you can indicate the volume and proceed by clicking the 'buy' button.

To execute a sell-stop order, you'll need to select the “sell” parameter. Next, it's crucial to establish the selling price, ideally below the current market price. Once you've completed that step, you'll need to indicate the volume and then select the "sell" button.

When the price doesn't align with the forecast and fails to reach the stop order level, the trader will choose not to open a position, thus avoiding a potential loss. However, it's important to note that the price may move in the opposite direction of the forecast even after the stop order has been executed.

  • Limit orders

They go against the anticipated price movement. To place a buy-limit order, you'll need to specify the desired entry price and set the required price accordingly. However, it is important for the price to be lower than the current market value, unlike the stop-buy order.

For the sell limit order, the entry price needs to be higher than the current market price. This implies that the trader expects an initial upward correction, followed by a subsequent price decline. Should the forecast not materialize, we won't execute the order, leading to a negative financial outcome. If the order is successful, the potential profit may be greater than what the market or a stop order would yield.

When you initiate trades using any order type, initially, the outcome will be unfavourable from a financial standpoint. This is due to the variations in prices at which other market participants are willing to buy or sell an asset. Therefore, closing the position at this moment would result in a negative yield, as indicated in the 'Profit' section.

Having sufficient funds to sustain a trade is crucial, especially in day trading. The 'Assets used' section displays the margin, which is based on the leverage. As leverage increases, the margin decreases.

Example of an open position

Picture yourself choosing to engage in trading Contracts for Difference (CFD) on the stock market. In your opinion, the stock of Company XYZ, which is currently priced at $100, is undervalued and has a high potential for price appreciation. You choose to take a bullish stance on ABC's stock by initiating a CFD position to purchase 100 shares.

With a CFD, you have the opportunity to make predictions about future market movements in the price of the asset, without the need to own or buy the underlying asset. When it comes to XYZ's stock, your open buy CFD position essentially means that you stand to gain if the stock's price goes up, but you'll experience a loss if the stock price goes down.

Let's say the stock price of Company XYZ does indeed increase to $120 over time. Based on your CFD position, you have the potential to earn a profit of $20 per share, resulting in a total profit of $2,000. On the other hand, if the stock price drops to $90, you would experience a loss of $10 per share, which would ultimately lead to a $1,000 loss when you decide to close the position.

Managing risk in your open position

It is advisable for investors to minimise risk by maintaining open positions that represent 2% or less of their overall portfolio value. By diversifying the open positions across different market sectors and asset classes, an investor can effectively mitigate risk.

Investors can adjust their sector allocation according to market conditions, but they must limit individual stock positions to a maximum of 2% to effectively manage risk. Managing risk is critical when it comes to trading, and this also applies to open positions.

Implementing a solid risk management strategy is crucial for safeguarding your capital and ensuring sustained success in trading. Here are some factors to take into account:

Setting stop-loss orders

Using a stop-loss order can be a valuable tool in managing risk by automatically closing your open position at a predetermined level. Setting a stop-loss allows you to have control over the maximum amount you're willing to lose on a trade, which helps to limit the potential downside risk.

  • Take-profit orders

Similarly, a take-profit order allows for the automatic closure of a position once the market hits a predetermined level of profit. This tool is essential for disciplined trading and can play a crucial role in securing profits.

  • Keeping position sizes within limits

Calculate the optimal size of your open positions based on the total size of your trading account and your willingness to take risks. By implementing this strategy, you can safeguard your account balance against the potential negative effects of any individual trade.

  • Regularly analysing market conditions

Make sure to stay updated on the market conditions that affect your open positions. Understanding economic data, staying informed about news events, and analysing technical indicators can provide valuable insights to help you effectively manage and potentially make adjustments to your positions.


Pros and cons of open positions

Pros

The most significant advantage of holding open positions is the ability to capitalise on larger market movements over time

Open positions can offer traders the flexibility to enter and exit the market at times of their choosing

In some jurisdictions, holding open positions instead of frequently trading can lead to tax benefits

Cons

Market conditions could change dramatically overnight or during the weekend when trading is closed

Open positions, particularly leveraged positions, require a portion of the full contract value as margin

Holding open positions could also place psychological pressure on a trader, particularly if the position is in a loss

Conclusion

Every available position carries both a risk and an opportunity. It is important that you comprehend, manage, and eventually take advantage of your open positions as you navigate the trading industry. Stated differently, closing a position in the market is equivalent to adopting the opposite position and cancelling out an existing one. This would involve selling the securities in a long position and buying them back in a short sale. Usually, a trader initiates a closing transaction, although brokerage houses may occasionally compel one to close if certain requirements are met.

image alt image alt
image alt
<
Didn’t find what you were looking for? Visit our Help Center or contact our Client Support
This site is registered on wpml.org as a development site. Switch to a production site key to remove this banner.