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Whether in the stock market or the cryptocurrency market, you will encounter 'closing a position.' Closing a position is a professional term in financial markets, referring to the act of an investor ending or closing an already opened trading position.

Closing a position is not as simple as selling! Understand the closing mechanism to avoid liquidation risks!

So, what is closing a position? When should you close a position? This article will detail what closing a position is, the types of closing, risks, and precautions.

What is closing a position?

The term closing a position is often mentioned in stock futures, options, or cryptocurrency trading. Simply put, closing a position means ending your trading position. So, is closing a position synonymous with selling? Not entirely correct.

Generally, trading can involve going long or short, and the essence of closing a position is to end a trade, so it corresponds to different situations:

Going Long: Profit by buying low and selling high. Investors will first buy in to go long, so the subsequent closing involves selling.

Going Short: Profit by selling high and buying low. Investors will first sell to go short, so the subsequent closing involves buying back.

Extended Reading: What are Going Long and Going Short? Learn this trick to avoid being short-squeezed!

What is going long?

Types of closing positions

Generally, situations for executing a close fall into the following three categories:

Active Closing

Investors decide on the timing to close their positions, which may be based on the current situation for actively closing, or triggered by pre-set orders to close. For example:

First, use $80,000 to go long on BTC, then if it rises to $100,000, the investor wants to take profit and manually closes. Similarly, if using $80,000 to go long on BTC and setting a stop-loss at $72,000, if the price drops to $72,000, it will automatically execute a close. Whether manual or automatic, as long as the closing is based on the investor's trading plan, it counts as active closing.

Passive Closing (Forced Closing)

Taking cryptocurrency contract trading as an example, when losses drop below the maintenance margin, the system will actively intervene to force an exit from the trade. However, investors' margins may be wiped out during the forced closure process, hence it is also referred to as liquidation. For instance, if an investor uses 500U margin to go long on BTC at $100,000, with 5x leverage.

If the price drops by 10%

Losses can magnify to 50% (10% * 5), bearing a floating loss of 250U, but this will not trigger a close.

If the price drops by 20%

In theory, losses can be magnified to 100% (20% * 5), at which point investors would lose all assets within their margin, resulting in a loss of 500U. However, in practice, to avoid liquidation (where there are not enough orders to close a position, causing losses to exceed the margin), the system will not allow losses to expand to 100%. Generally, when losses reach 80%, forced closing will occur early, leading investors to directly recognize a loss of 400U and exit the trade. For a complete understanding of the contract trading mechanism, you can refer to the articles below. Extended Reading: How to Operate and Profit from Binance Contract Trading? Complete Guide to Binance Contract Trading.

Automatic closing upon expiration

Besides perpetual contracts without an expiration date in cryptocurrency, futures, options, and other derivatives typically have expiration dates. Once the contract expires, it will automatically close and settle gains and losses.

Generally, investors can open a new contract with a longer expiration date before the original contract expires to extend the original position, and this operation is called 'rolling over'.

Closing risks and precautions

Although closing a position is part of trading, executing a close may face the following risks; here are a few points to note:

Slippage risk

In markets with significant price fluctuations or poor liquidity, the closing transaction price may be worse than expected. For example, if you want to exit at $100, but the actual transaction price becomes $98, that’s facing slippage!

Risks of being unable to close a position

In practice, even if investors want to close their positions, they may encounter situations where they cannot close:

Insufficient market liquidity

Buyers and sellers are scarce, and orders cannot be executed for a long time after being placed (e.g., obscure stocks or small tokens).

Market crashes or circuit breakers

Market halts trading (e.g., US stock circuit breakers/Taiwan stock limit downs), making it impossible to close a position. The exchange or brokerage may crash.

During severe market volatility, system delays or server crashes may prevent placing orders or executing closings, such as during the 519 crash when many cryptocurrency exchanges experienced downtime. Trading restrictions or account freezes.

Investment products may be restricted from trading (e.g., delisting of cryptocurrencies, prohibition of closing positions before futures delivery), or accounts may be frozen by brokerages due to abnormal trading behavior.

When should you close your position?

No one can predict the market, so when to close a position depends on individual trading strategies. Common closing triggers include: reaching the target price. If you buy a stock expecting to sell at $100, and the price really reaches that point, don’t hesitate, close the position! Based on trading plan stop-loss. Investors set a maximum acceptable loss price according to their risk tolerance, and if the market trend doesn’t align, strict execution of closing the position to stop loss should be followed to avoid greater losses.

Market environment changes may involve significant news, such as a company scandal or global stock market crash. At this time, quickly closing positions and observing market trends is advisable. Once the trend is clear, consider re-entering.

Conclusion

In investment trading, knowing when to enter a position doesn’t mean you will make money; what really makes money is knowing how to close a position! Investment is not just about luck; understanding closing timing and risk management is essential to truly stand firm in the market!

This is a detailed explanation of what closing a position in the cryptocurrency market is, when to close a position, the types of closing, risks, and precautions.

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