When traders make orders on the capital markets, they are holding open positions until they execute an opposite transaction and close out the deal. What exactly are open positions and how much is too much when it comes to these trades?
Open position definition
An open position refers to a trade that has been set up and executed, but not met with an opposing trade. If a trader owns 1000 shares of a particular stock, this is classified as an open position until the trader sells these 1000 shares.
An open position is any position that puts the trader’s assets at risk from direct investment.
Holding short or long positions also qualifies as open positions.
Why it is important for traders to understand an open position
- Positions in highly liquid markets can be opened and closed in a matter of seconds
- A position will remain open until an opposing trade is executed
- Open positions give exposure to risk until the position is liquidated
- The degree of risk associated with an open position depends on the asset held
Open position explained in detail
Open positions expose traders’ funds to risk. Regardless of how risky the asset is, a position is considered open as long as the trader holds the particular asset or maintains a short/long position.
Holding multiple positions in high volatility assets, such as stocks, options, forex, and futures is considered to be highly risky.
Multiple simultaneous open positions can spread the trader’s attention thin and many different factors need to be considered to avoid losses.
It is advised to keep simultaneous open positions at a minimum, especially during active trading.
Long-term investing can benefit from many open positions, while trading demands a low reaction time and rapid decision making.
The same risk-assessment process needs to be implemented in managing open positions as in managing a long-term portfolio.
Open position example
Let’s assume a trader wants to buy 1000 shares in Apple Inc. (NASDAQ:AAPL). Once they have placed and executed a buy order for 1000 shares, they now hold an open position in Apple stock.
If the trader eventually wishes to close the position, they will have to execute an opposite transaction, which In this case is a sell order. Once the stocks are sold, the trader has successfully closed their position.
The same process applies to short and long positions – to close a short position, the trader needs to buy back the shares, or sell them in case of a long position.
FAQs on open position
How to close an open position?
To close an open position, the trader needs to conduct an opposite transaction. If the trader holds assets, such as stocks, bonds, futures, etc. to close the positions, they will need to sell all the assets and convert them into cash.
Short and long positions will also need to be reversed to consider them as closed positions.
How many open positions can I have?
Traders are not limited by the number of open positions they can maintain. However, keeping multiple open positions while actively trading can be difficult. The time spent maintaining and adjusting many open positions can lead to missed opportunities and/or overlooked news, which can lead to the underperformance of said positions.