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Forex Open and Closed Positions - What Does it Mean

2020-12-09

2020-12-09

What do open and closed mean in Forex trading?Artem Shashkov

Any Forex transaction implies a period of time. The period begins with the opening of a position – you either buy a currency pair when the exchange rate should increase or sell it, expecting the price to fall. Closing a position is the reverse operation - you sell what was previously bought or buy out what was previously sold at a new market price.

The article covers the following subjects:

How to open forex position: definition & examples

First, I’d like to explain what is the meaning of open position. To make money on Forex trading, you should sell at a higher price than you have bought. Therefore, making a profit always implies two transactions; you both buy and sell.

One of the trades will be the initial decision - when certain market conditions imply a further change in the price in the right direction.

When the asset price goes below its all-time high, there is a possibility of its rise in the future.

The second trade will fix your trading result – if the price has changed according to your forecast or has started moving in the opposite direction.

If your forecast was correct, you will record a positive result, i.e., you will take the profit.

If your forecast was wrong, you will record a negative result, which is a loss.

An open position is when you enter a buy or sell trade but haven’t yet received a financial result. If you buy an asset expecting it to increase in value, you have an opened buy position. If you sell a currency pair, expecting it to depreciate, you hold a sell position.

Have you come across such terms as a ‘buy,’ a ‘long,’ or a ‘long position’ relative to open position definition? All these concepts mean a buy trade.

A ‘sell,’ a ‘short,’ or a ‘short position’ means opening a sell position.

You should understand that all those slang words mean a trading operation, not the intention to buy or sell an asset in the future under particular market conditions.

How to enter a forex trade?

Before you decide to enter a Forex trade, I recommend studying the mechanics of the market and at least a couple of trading strategies. Thus, you will understand the basic conditions favorable to enter a trade.

The next step is to determine the entry rules.

There are two of them:

Option 1: you enter by market order. You open a position at the best market price. In terms of psychology, it is more comfortable compared with the pending orders. After you put a market order, you are 100% in the market.

However, it is a drawback. If your forecast is wrong, you will have a loss. You can avoid losing trades by using pending orders.

To enter by market, you should select the parameter ‘now’:

Next, you choose the position direction (buy or sell), and volume

An example of opening a long position by the market:

An example of opening a short position by market:

Entry option 2: Pending order. The trading order is delayed. It is presumed that favorable market conditions will appear.

To enter a forex trade setting a pending order, you should select the parameter ‘At the price’:

Pending orders come into two types:

Stop orders. They are set following the expected price direction. For example, the current EURUSD price is about 1.1850. But someone will consider the further uptrend to continue only when the price goes higher than level 1.1900. So, such a trader will set a stop order to buy at 1.1900. It will be a less profitable trade, but the trader will act according to the trading strategy.

To set a buy stop order, you need to set the price higher than the current one. Next, you specify the volume and click on the ‘buy’ button.

If you want a sell stop order, you should choose the ‘sell’ parameter. Next, you set the price you want to sell at, which should be below the current price. After that, you specify the volume and click on the ‘sell’ button. If the price is at a level of around 1.1850, a sell stop order is set at a level of 1.1800.

If the price doesn’t go according to the forecast without reaching the stop order level, the trader won’t open a position and will avoid a losing trade. But the price can go in the direction opposite to the forecast after the stop order has worked out.

Limit orders. They are set opposite to the expected price movement.

Let’s take the same example with EUR / USD and the current price around 1.1850. The trader assumes that the price will grow but wants to buy cheaper. In this case, he/she can place a buy limit order at 1.1800. If the price drops to this value, the trader will buy more profitably. If the price continues to rise without a pullback to 1.1800, the trader will not open a position.

 To set a buy limit order, you need the entry parameter ‘at the price’ and set the required price. But the price should be below the market, unlike the stop buy order.

In the case of the sell limit order, the entry price must be higher than the current market price. It means the trader expects an upward correction first and then a price drop. If the price is, for example, around 1.1850, one can set a sell limit order at 1.1900.

If the forecast doesn’t come true, the order will not be opened, and the following financial result will be negative. If the order works out, the profit will be higher than that yielded by the market or a stop order.

 When you open a position by any order type, at first, the financial result will be negative:

This is due to the difference in prices at which other market participants are willing to buy or sell an asset.

In our example, a buy position is opened at $15249.75. If I wish to immediately close the position, I can only sell the asset to the trader who is willing to buy it right away. The best price at which other Forex participants want to buy now is 15203.2. It is lower than the price I have entered a buy trade.

Therefore, if I close the position right now, the yield will be negative, shown in the ‘Profit’ section.

To enter a trade, you must have enough money to maintain it (margin) even in day trading. The margin is displayed in the ‘Assets used’ section and depends on the leverage. The higher is the leverage, the less is the margin.

The bigger the trade volume (contract size), the more money you need to open a position; it is a market axiom.

In our example, we should have at least 15.25 USD – it is the minimum amount needed to open a position with the volume chosen (0.01 lot) for the BTCUSD.

Let us study the example when the currency of the deposit and the currency of the purchased asset are different.

For example, my account currency is the USD, and I want to buy the LTCBTC. It means I want to buy Litecoins for Bitcoins.

In this case, the BTCUSD instrument is first bought for dollars on the account. And after that, Litecoin is bought, selling Bitcoin, which will be the LTCBTC pair’s purchase.

This is called double conversion, and it is made automatically.

If the account currency is the same as that of the instrument traded, the double conversion doesn’t occur. For example, if my deposit is in euros, and I trade the EURUSD pair.

Trader forums are full of information on how to enter a Forex trade correctly, but the “correctness” of any method, in my opinion, is subjective. It all depends on the rules of the trading strategy and the personal trading style. The entry and wring points and rules will be different for positions trading and scalping. The strategy to open a position also depends on a trading asset. The entry rules are different for currencies, precious metals, stock, and CFD.

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Open Positions and Risk

When you start Forex trading, it is more comfortable at first to have positions open than to close them. The first wishes of a beginner trader are usually like this:

You shouldn’t rush with either the first or the second, friends. Closed and open positions finance must be in balance.

If you enter too many trades, sooner or later, there will be no free funds left on the account, which are necessary to ensure the next position. Let’s go back to the example with BTCUSD; this is what will happen if four positions are opened simultaneously:

To open positions, you need to use 61.39 USD. The more positions opened you have, the less free fund available for operations. It means that the number of positions you can open is limited by the deposit amount. This way, you won’t be able to open any position sooner or later. And this position that you won’t open could generate a great profit. It is a simple method of arithmetic mean.

You should not be impatient in trading, and the key to success is to be selective.

Let us study the second error – to enter the market with a too big volume.

Let us assume that I want to buy 0.1 lot of BTCUSD. Look how much money on the account is used:

Therefore, if the deposit amount is about $170, a short price movement in an unfavorable direction will make it impossible for me to enter any new trades, according to the method of arithmetic mean.

Suppose the loss on an open position is close to the difference between the deposit amount and the amount of collateral. In that case, the position will be closed by the system automatically. And from that moment on, I will no longer be able to open new positions on this instrument or others, as in the position diversification strategy, because I will not have enough funds to secure them.

So, the second rule of open position and closed position in Forex trading is risk management. You had better gain the profit gradually. It means you should enter several trades of small volume with low risk, not vice versa. The open position diversification also reduces market exposure; it doesn’t matter if it is a normal trading day or a market shock. The forex position volume is crucial for scalpers and intraday traders, as a single price swing in the opposing direction could ruin the entire deposit.

How to close position: definition & examples

Let us find out what is a closed position.

A closed position is a situation when the financial result of the opened position is fixed.

If the asset grows in value after opening a buy position, the closed position will record a positive financial result, i.e., a profit. If the asset depreciates after you enter a long position, the position closed will yield a negative result, i.e., a loss.

With the sell position, the principle is the same. Closing position at a lower price will fix a profit for a trade. A short position closed at a higher price will record a negative trading result.

After you close position, the trading result will be displayed in the ‘Trading history’ graph.

How to close all positions in forex?

You already know what is close position. To close a buy position, you need to enter a sell trade of the same volume. For example, if you opened a buy position with a volume of 0.1 lots, then to close it, you will also need to sell 0.1 lots.

According to a close position meaning, you must accordingly buy the same amount of the asset to exit a sell order.

If you close a smaller volume than the original trade, you will close a part of the position.

For example, if you opened a long position and bought 0.1 lot of the EURUSD, and next, you sell 0.03 lot of the EURUSD, the remaining position of 0.07 lot will still be open.

If you enter a long position and buy 0.1 lot and then sell 0.13 lot, your long position will be closed, and at the same time, there will be opened a short position of 0.03 lot. In this case, the volume of the transaction closing the position is greater than the volume of the order that opened the position.

The financial result of trades is always calculated only after the position is closed.

How to close position in Forex?

The easiest way to close Forex open positions is exiting by market, i.e., you manually exit the order by the market price at the present moment.

Besides, you can set the parameters of automated closing the position at a predetermined price.

When the position is closed by a stop loss, it means that the trade is exited automatically. A stop-loss works out if the price goes in the opposite direction to the forecast.

A stop loss for a long position is set at a lower price than the entry point.

A stop loss for a short trade is set at a higher price.

A stop is set at such a price level, which proves that the expected trading scenario hasn’t worked out.

If the scenario turns in the right direction, some traders prefer to set the stop loss, going in the price movement course to reduce the trade’s market exposure.

Such a stop order is called a trailing stop. The most common way to set the trailing stop is ‘n’ pips from the current price.

For example, after the US monetary policy statement, you enter a buy trade on the EURUSD and set a trailing stop ‘30’ pips. Therefore, if the EURUSD goes up by 30 pips from the entry price, the stop loss will move to the entry price. If the price grows by 40 pips, the stop loss will be ten pips higher than the entry price. Differently put, as long as the price is rising, the stop loss will be at a distance of 30 pips below the highest price value.

If the price stops growing or starts declining, the trailing stop won’t be moving down with the price.

The trailing stop tool allows protecting a part of the potential profit. In case the price trend reverses according to the trader’s expectation of long-term price trend. Using the trailing stop, you can take the profit if the price trend has been originally going in the expected direction but turns in the opposite direction before it reaches the expected profit.

Closing positions by a take profit means that your position is closed at the target profit level.

For a long position, you set a take profit at a higher price. For a short position, you set a take profit at a lower price. You put a take profit order at such a price level that the price should go to after opening a position.

According to the market situation analysis, professional traders set the percentage value of the stop loss and the take profit orders even before the transaction. Experienced traders are not prone to making questionable judgment based on the imminent price movement.

The stop loss value indicates the amount that the trader is willing to risk to close the position at a profit. And the value of the take profit suggests the amount of expected profit in the transaction.

The critical point is that the closing position in Forex is always planned before. T

I suggest you read more about the stop loss and take profit [here][2].

P.S. Did you like my article? Share it in social networks: it will be the best “thank you” :)

Ask me questions and comment below. I’ll be glad to answer your questions and give necessary explanations.

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The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteForex. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.

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  1. my.liteforex.com/trading/?category=for-beginners&slug=forex-open-and-closed-positions&type=currency
  2. www.liteforex.com/blog/for-beginners/stop-loss-and-take-profit-in-forex/
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