Forex trading allows traders to profit from the buying and selling of currencies. When a trade is entered but not yet closed, it is considered an open position. Understanding how to manage open positions is a key aspect of successful forex trading. This comprehensive guide will provide an in-depth look at everything you need to know about open positions in the forex market.

What is an Open Position?

An open position in forex trading refers to a trade that has been entered but not yet closed. It represents an ongoing contract that has been opened on the market. There are two types of open positions in forex trading:

Long Position

A long position, also known as going long, means buying a currency pair with the expectation that it will rise in value. Traders enter long positions when they believe the base currency will strengthen against the quote currency. For example, going long on EUR/USD (euro/U.S. dollar) means buying euros in the expectation that the euro will rise versus the dollar.

Short Position

A short position, also known as going short, involves selling a currency pair with the expectation that it will fall in value. Traders enter short positions when they think the base currency will weaken against the quote currency. For instance, going short on GBP/JPY (British pound/Japanese yen) means selling pounds in the belief that the pound will decline compared to the yen.

Why Manage Open Positions?

Managing open positions is a critical skill in forex trading. Here are some key reasons why active position management is essential:

  • Mitigate losses – Close losing positions quickly to prevent further losses. Use stop losses to control downside risk.
  • Protect profits – Manage winning trades to lock in gains. Use take profit orders or trailing stops to ride trends.
  • Adapt to changing market conditions – Keep adjusting stop levels or close positions early to account for volatility or shifting momentum.
  • Stick to trading plan – Follow rules on position sizing, risk management and trade criteria to manage trades effectively.
  • Improve win rate – Disciplined open position management helps achieve higher percentage of winning trades.
  • Maximize returns – Let winning trades run by using appropriate strategies to optimize potential gains.

In essence, proper open position management is what separates successful traders from beginners. It requires vigilance, discipline and risk control to maximize profits while minimizing losses.

How to Manage Open Positions

Here are the key steps traders should follow to effectively manage open forex positions:

1. Set Exit Points Before Entering Trade

Before entering a position, determine exit points for taking profits and cutting losses. This includes setting take profit and stop loss orders at the time of trade entry. Take profits lock in gains while stop losses control downside risk. Appropriate levels will depend on factors like volatility, market conditions and trading strategy.

2. Actively Monitor the Market

Closely track price movements, market news and events, technical indicators, economic data releases etc. that can impact traded currency pairs. Stay informed on developments that may affect open trades. Updates may require adjustment of stop levels or early exit from positions.

3. Use Trailing Stops

Trailing stops are a type of stop loss order that follows favorable price action. As the market moves in the trader’s favor, the stop level also automatically moves to lock in some profits. This allows maximizing upside while limiting downside risk.

4. Scale Out of Winning Trades

Instead of exiting the entire position at one price, scale out by closing parts of the position at different profit targets. This enables riding trends longer while banking some profits along the way.

5. Cut Losses Quickly

Don’t wait for losing trades to rebound. Close out trades that go against you quickly before incurring large losses. Preset stop losses help exit bad trades early.

6. Adjust Stop Levels

As the market fluctuates, raise stop loss levels on profitable trades to protect more gains. On losing trades, move stops closer to entry price to control losses. Adjusting stops allows managing trades based on changing conditions.

7. Monitor Market Sentiment

Keep an eye on overall market sentiment, which impacts most currencies. If sentiment turns against open positions, it may be wise to exit trades early and avoid fighting the prevailing trend.

8. Use Charts and Indicators

Analyze price charts, indicators and patterns to gain insights for managing open trades. Indicators like Moving Averages help assess momentum while chart patterns signal potential breakouts or reversals.

9. Record Notes on Trades

Take notes on why trades were entered and how they are managed. Review past trades to improve position management skills. Keep a trading journal to track learnings.

10. Remain Disciplined and Patient

Follow trading plans diligently. Don’t override stop levels or holding periods due to greed or fear. Be patient and let trades play out for best results.

With the right strategies, discipline and risk management, active open position management can significantly boost forex trading success.

Common Questions About Managing Open Positions

When should I close an open position?

Open positions should be closed when:

  • Take profit or stop loss level is reached: Close trade once predefined exit price is hit.
  • Market conditions change: Shift in sentiment, new data or events may require closing position early.
  • Better opportunity arises: Close current trade to free up capital for a trade with better odds.
  • Loss limit breached: Close trade if losses exceed maximum loss amount trader is willing to accept.

How do I close an open position?

Open positions can be closed by placing an order opposite to the entry order:

  • Long positions are closed by selling back the base currency.
  • Short positions are closed by buying back the base currency.

The order can be a market order to close immediately or a pending take profit/stop loss order.

Should I close winning or losing positions first?

Close losing positions as soon as possible to minimize losses before closing winners. Capital protection is key in trading. Maximize gains only after containing losses.

Can I reverse an open position?

Yes, open positions can be reversed. To reverse a long trade, sell back the base currency. For short trades, buy back the base currency. This closes the current position and opens a new one in the opposite direction.

What happens to an open position at end of day?

Open positions remain open even after the daily trading session ends. At 5pm EST every day, all open trades are rolled over to the next 24-hour trading session. Traders incur a small fee for keeping trades open overnight.

How much margin is required for keeping positions open?

Brokers require traders to hold a minimum margin in their account for open trades. Margin requirements vary across brokers and currency pairs traded. On average, 1% of trade size is blocked as margin for both long and short positions.

The Bottom Line

Successful forex trading hinges greatly on how well open positions are managed. Employing effective trade management strategies enables traders to maximize profits and minimize losses. With the right risk controls and disciplined approach, traders can use active open position management to significantly improve their overall performance in the forex market.