Close Positions in Trading: Everything You Need to Know

Understanding trading as a beginner requires learning the basics first, and there's no better way to start than with opening and closing positions. Namely, all instruments in the market move in price, and the asset's price is represented on a chart. This asset can grow in price, leading to the chart going up, or it can fall, leading to the chart going down.

Of course, traders can get potential profit from the market regardless of the chart's direction. Namely, a trader can open a long position, where you expect the price to go up, or a short position, where you expect it to go down—opening a sell trade to get potential profit from the price going down.

However, to profit from a trade, you must understand how you can properly close a position. So, let's see what closing a position means in more detail.

What Is a Close Position in Trading?

Simply put, closing a position in trading means exiting an open trade and taking profits or losses accordingly. This can be done either manually if the trader is tracking their trades closely, or automatically with the help of stop-loss orders that could limit the risks on both long and short trades.

It's worth mentioning that there are many reasons why a trader would close a position. These include:

• Taking profits from an open long or short position.
• Mitigating a potential loss, anticipating that the market is headed in the opposite direction.
• Preventing forced liquidation by the market or your brokerage.
• Adding liquidity to your account for a bigger position.

Short Selling

Short selling involves opening a position in an instrument with the expectation that it will fall in price, and closing it to take potential profits. To short sell, you first artificially "borrow" shares from your brokerage to open the position. When the time comes to close this position, you "return" these borrowed shares back to the brokerage, and any profits or losses are calculated accordingly.

Exiting a Long Position

The most common type of position is a long position, where you open a buy trade with the expectation that it will rise in price and close it to earn a potential profit in the price difference. To close such a position, the trader "exits" the market by reversing their trade, effectively selling the asset back to the brokerage at the current market price and earning potential profits.