What is an Open Position?
An open position is any trade you have entered that has not yet been closed by an opposing trade. If you bought (long) shares, you have an open long position until you sell them. If you sold short, you have an open short position until you buy back the shares. Open positions represent current market exposure and create ongoing risk until they’re closed.
Key takeaways
– Open positions = active trades that have not been offset by an opposing trade.
– They create market exposure and therefore risk (unrealized gains or losses) until closed.
– Managing open positions requires position sizing, diversification, order types (stop-loss, limit), and monitoring—strategies differ for long‑term investors, swing traders, and day traders.
– Closing a long = sell; closing a short = buy back the shares.
(Source: Investopedia)
Open position explained
– Types: long positions (owning an asset), short positions (sold an asset you don’t own), and leveraged/margin positions.
– Duration: can be held from seconds (scalping) to years (buy-and-hold).
– Profit and loss: while the position is open, P&L is unrealized and changes with market price. Once closed, P&L is realized.
– Market exposure: the size of the open position relative to your total portfolio determines its contribution to total risk.
Common examples
– Buy 500 shares of Company X = open long position of 500 shares. Close by selling 500 shares.
– Short 100 shares of Company Y = open short; close by buying 100 shares back.
– Day trader opens and closes multiple positions intraday (round-trip trades).
Risks associated with open positions
– Market risk: price moves against you.
– Overnight/gap risk: news after market close can cause price gaps at the next open.
– Liquidity risk: inability to exit at desired price in thin markets.
– Leverage/margin risk: magnified losses and potential margin calls.
– Systemic risk: broad market events that affect many positions simultaneously.
– Short-specific risk: unlimited loss potential and short squeezes.
Practical steps to manage open positions (general rules)
1. Define your objective and horizon
– Long-term investor: focus on fundamentals and diversification.
– Swing trader: hold for days to weeks; use technicals and stops.
– Day trader: close positions same day to avoid overnight risk.
2. Set position size limits
– Use a risk-per-trade rule (common guidance: risk no more than 1–2% of account equity on a single trade).
– Position-sizing formula:
– Dollar risk per share = entry price − stop-loss price (for longs).
– Position size (shares) = (Account equity × Risk per trade %) / Dollar risk per share.
– Example: $100,000 account, 1% risk = $1,000. Entry $50, stop $45 → dollar risk per share = $5 → size = $1,000 / $5 = 200 shares.
3. Use stop-loss and take-profit orders
– Place a stop-loss to cap downside; consider a trailing stop to lock gains.
– Predefine profit targets and risk-reward ratio (e.g., 1:2 or greater).
4. Diversify across sectors & asset classes
– Avoid concentration in a single stock or sector; spread exposure across equities, bonds, commodities, cash equivalents, and possibly alternatives.
– The “2% per-stock” rule (mentioned in common guidance) means no single position exceeds 2% of portfolio value.
5. Monitor correlation and portfolio beta
– Correlated positions amplify risk. Check how new positions move relative to existing holdings.
– Reduce aggregate market exposure if portfolio beta is too high for your risk tolerance.
6. Plan exits in advance
– Know the conditions for closing: stop hit, target reached, fundamental change, or rebalancing trigger.
– For short positions, be ready to buy to cover quickly if adverse movement accelerates.
7. Protect against overnight and event risk
– If you don’t want overnight exposure, close positions before market close.
– Before earnings, news events, or macro releases, reduce or hedge exposures.
8. Use hedges when appropriate
– Options (puts as protection), inverse ETFs, or correlated asset hedges can limit downside for large or concentrated positions.
9. Maintain liquidity and margin discipline
– Ensure sufficient cash or buying power to meet margin requirements and to take advantage of opportunities.
10. Review and rebalance periodically
– Reassess positions in light of performance, fundamentals, and market conditions. Rebalance to maintain target allocations.
Practical steps for different trader types
Long-term investors (buy-and-hold)
– Step 1: Determine target allocation by asset class and sector.
– Step 2: Size each position so no single holding exceeds your chosen limit (e.g., 2% per equity).
– Step 3: Use fundamental analysis to choose positions; set broad rebalancing rules (e.g., annual or threshold-based).
– Step 4: Consider protective hedges only for large concentrated bets.
– Step 5: Use stop-losses sparingly—focus more on diversification and long-term planning.
Swing traders
– Step 1: Identify entry with technical/fundamental signals.
– Step 2: Set stop-loss just below technical support or max dollar risk.
– Step 3: Define profit targets and use trailing stops to lock profits.
– Step 4: Limit position size using the risk-per-trade formula and avoid holding through major news unless planned.
Day traders
– Step 1: Pre-market plan: list tradable setups, risk limits, and timeframes.
– Step 2: Risk per trade typically small, use tight stops and higher position turnover.
– Step 3: Close all positions before the end of the trading session unless intentionally carrying overnight.
– Step 4: Maintain discipline—don’t chase losses, adhere to daily loss limits.
Order types and tools to manage open positions
– Market order: immediate execution at current market price.
– Limit order: execute only at a specified price or better.
– Stop-loss order: becomes a market order when a trigger price is hit.
– Stop-limit order: becomes a limit order when triggered (control over execution price).
– Trailing stop: stop price moves with favorable price, protecting gains.
– Alerts and automated rules: price alerts, OCO (one-cancels-other) orders.
How to close positions
– Long: sell the shares or contracts you own.
– Short: buy back (cover) the shares you borrowed and sold.
– With options/futures: exit by offsetting the contract or exercising/assigning when appropriate.
Examples (quick)
– Example 1: Long trade — Buy 200 shares at $50, stop at $45 (risk $5 per share). Account $100,000, risk 1% = $1,000 → 200 shares.
– Example 2: Short trade — Short 100 shares at $30, place buy-to-cover stop at $34; if price rises to $34, you exit to limit losses.
Common mistakes to avoid
– Overconcentration in a single position or sector.
– Neglecting stop-losses or changing them emotionally.
– Holding losing positions hoping they’ll recover without a plan.
– Using excessive leverage.
– Failing to account for slippage and commissions when sizing trades.
Quick checklist before opening a position
– Why am I taking this trade? (thesis)
– What is my entry, stop-loss, and target?
– How many shares/contracts can I take given my risk rule?
– How does this position affect portfolio diversification and correlation?
– Do I need a hedge or plan for major events?
– What is my exit plan and re-evaluation schedule?
FAQ
– What’s the difference between an open and closed position? An open position is active and creates unrealized P&L; a closed position has been offset and its P&L is realized.
– Can open positions be hedged instead of closed? Yes—hedging (e.g., buying put options or shorting correlated assets) can reduce exposure without closing the underlying position.
– Do day traders ever hold open positions overnight? Some do, but they accept additional overnight risk and typically reduce position size or hedge before holding overnight.
Source
– Investopedia — “Open Position” (https://www.investopedia.com/terms/o/open-position.asp). Accessed for definitions and guidance summarized above.
Editor’s note: The following topics are reserved for upcoming updates and will be expanded with detailed examples and datasets.