Considerations to Close a Futures Position
After entering a futures trade, the primary decision you will make is when to close the position.
Traders generally close positions for several reasons:
- Profit targets have been reached
- Loss levels have been realized
- Margin requirements must be satisfied to avoid or meet a margin call
- A contract month expiration is approaching
Exiting a Profitable Position
There are several ways to manage profitable positions, including:
- Limit or take profit orders - placing an exit order that will automatically trigger when prices reach a specific price point, using a limit or take profit order. For example, if you purchased 20 Ether contracts at $200, you could enter a sell limit order for 20 contracts at $300 that would automatically exit at $300 or higher once the market rose
- Market orders - you could monitor the market activity and place a market order in real-time based on price action. For example, if you entered a position on a news event that caused Bitcoin prices to move quickly and significantly, you could opt to manage a winning trade by allowing the market to continue driving in your favor and exiting when you determine the time to do so is optimal
- Stop orders - if you enter a position that moves in your favor but you are not quite sure where to place a profit target, you can use a stop that protects your profit while allowing for additional upside potential. For example. If you had sold 50 Ether contracts at $500 and the price drop quickly to $400 but you were not sure if the market may continue selling off to $300, $200, or go even lower, you could place a buy stop at $450 and either leave it there for protection or modify it to lower price levels if the market declines further
Each exit strategy has considerations that affect the outcome of a trade. For instance, placing a closing order in advance using a limit or take profit order has the benefit of not requiring the trader to be at their computer for the order to fill, but the disadvantage is that the exit point is strictly defined to a price while the market could continue trade well beyond that point, leaving potential profit on the table. Alternatively, using a market order to exit winning trades could allow for maximizing the times when prices swing significantly in your position’s favor yet would require constant monitoring and may result in less optimal price execution than if a limit or take profit order had been used.
Exiting a Losing Position
There are several ways to manage losses, including:
- Stop orders - many traders consider placing protective stops at time of entering a position to be prudent risk management. This defines the amount of risk they wish to assume for a particular trade and can also be modified or canceled if needed but is intended to act as a protection against an outsized loss if the market moves against their position. For example, if you buy 1 Bitcoin contract at $10,000 and only wanted to risk $500 on the trade, you could place a sell stop order at $950 which will trigger once the market reaches that level
- Market orders - similar to how market orders are using to manage profitable trades, you can watch the price action of a contract and exit at the current market price when you are inclined to get flat
- Limit orders - while primarily used for profit targets, limit orders can be used to close losing positions as well. This is most useful when trying to exit at favorable price levels is more important than exiting immediately. For example, you bought 10 Bitcoin contracts at $900 and the price had spiked down to your desired exit point of $800 but was gyrating wildly between $750 and $800, you could place a sell limit at $800 rather than placing a market order to avoid risking additional loss based on where the order may actually be filled
Similar to exit strategies for managing winning trades, how you choose to close losing positions have several considerations that you should think about when determining what is most suitable for your trading plan.
Partial Position Close
A position can be closed using multiple orders for trade sizes that are less than the current open position size.
For example, if you had sold 10 Bitcoin contracts at $10,000 and the market was currently at $950, but you were concerned that market conditions could change in a way that would alter your risk level, you could elect to buy 5 contracts back now to lock in a profit and leave the remaining 5 open to close at another time and price.
Partially closing a position utilizing multiple orders can be useful when:
- Exiting a large position where a single order could negatively impact the execution price
- Targeting multiple profit targets
- Managing multiple protective loss levels
- Working for a better average price of trade execution
- Trading in volatile markets when price may swing wildly
Complete Position Close
A position can also be closed using a single order for the entire position size.
For example, if you purchased 5 Bitcoin contracts at $9,000 and the market was currently at $9,500, you could choose to either sell 5 when the price reached $10,000 or sell 5 when the price reached $8,500. Either order being filled would offset your open position entirely.
Closing a position completely utilizing a single order can be useful when:
- Exiting a small position where price slippage is not likely to occur
- Targeting a single price target
- Simplifying risk management by using a single exit point
- Market conditions have changed such that getting flat quickly is a higher priority than maintaining any additional price exposure
How to Place an Order to Close a Futures Position
ACDX’s trading platform offers several different ways to place orders to close a position, allowing you to use the tools that work best for you.
To partially close a position:
You can use any of the modules that support order placement, including Order Entry, Chart, and Order Book.
To completely close a position:
You will need to take the opposite buying or selling action in the same futures contract that you currently hold in your account. For example, if you had bought 5 Bitcoin Sep 2020 contracts, you would need to sell 5 Bitcoin Sep contracts in order to offset and close the position.
You can use Order Entry, Chart, and Order Book to submit the offsetting order. ACDX also provides additional features that allow for quickly closing the contract position using a market order and canceling all working orders for the specified contract with a single action. Here are articles on access and use that feature: