After establishing a futures position, the primary decision you will make is when to close the position.
To close an open position, you can take the opposite position in the same futures contract you are currently holding in your account.
For example, to close an open long position in the March 2018 Crude Oil contract, you would place an order to sell the same number of contracts in the March 2018 Crude Oil contract.
Traders will generally close positions for three main reasons:
- Profit targets have been reached and the trade is exited at a profit
- Stops levels have been reached and the trade is exited at a loss
- Trade needs to be exited to satisfy margin requirements
Exiting a Rising Position
One way to exit a position is by placing an exit order that will trigger automatically when prices reach a pre-determined target, using a limit order.
Assume a trader has purchased two E-mini S&P 500 (ES) contracts at 2,600.
In the first scenario, the trader places an order to exit the ES contracts at a price of 2,605 for a profit of $500 on the trade. An order will be generated automatically to sell if price moves to this level.
Another option is for a trader to decide to watch the market and place an order in real time as the market is moving. The closing order, either a market or limit, to exit the position is entered when they see price reach 2,605.
In both scenarios, the trader is selling to close their long position for profit but may have different outcomes based on the exit strategy they implement to close the trade.
PROS AND CONS
Each exit strategy has considerations that affect the outcome of the trade.
The advantage to placing a closing order in advance, is that a trader does not have to be at their computer for the order to fill.
But a disadvantage is that a trader who places an order in advance may exit before the move is over, and could have closed the position out for more profit had they been monitoring the move in real time.
The trader who waits and places their closing order once price reaches their target, may be able to time the end of a move to maximize profits, but risks holding a position too long and missing the exit before it retraces.
Exiting a Losing Position
In the next scenario, the trader is looking to protect their position from excessive losses as a result of the S&P 500 declining below 2,600. The trader has placed an order in advance to close the position at a specific price, typically referred to as setting a stop.
The trader has placed their stop order at 2,595 which would equal a loss of $500 if the trade is automatically exited as price moves to 2,595.
Another way to exit a trade is to monitor price in real time and place an order to exit, using market or limit order, when price reaches a specific level.
PROS AND CONS
Each strategy to exit a losing position has its own considerations.
Traders who place an exit order in advance with a stop will not need to be at the computer to manage a loss, but may find they exit too soon and are filled only to have price move back in their favor.
If a trader watches price for an exit signal, they might stay in a trade too long and incur more loss than they planned. However, a trader watching the market in real time might be able to time an exit based on the natural market movement and account for price swings.
Another reason for closing a position is that the trader receives a margin call and must close out their trade, regardless of the market price. Brokers will either notify their client or automatically liquidate the trader’s positions to free up account margin.
When traders close a futures position for a profit their account balance will increase.
If the trader closes the futures position for a loss the funds are withdrawn from the traders account and their account balance will go down.
Once trades are closed the margin that was being used for that trade is no longer needed and that margin is now available if the trader wants to place another futures order.
Traders will typically receive daily statements showing the trades they have placed in their account and any open trades and the funds that are available in their account.
For additional information on margin, please review Performance Bonds/Margin.
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