When you are new to trading, the terms on your platform can be confusing. You see flashing numbers, but what do they mean? The most basic concept is the open position. An open position is a live, active trade that has not yet been closed. It is the starting point of every profit or loss and is directly tied to your “floating” P&L.
This guide explains the definition of an open position, the key risks involved, and how professional traders manage their active trades.
Key Takeaways
- An open position is any active trade (buy or sell) that is currently exposed to market movements.
- An open trade is live and can still change in value. A closed trade is finished, and the gain or loss is final.
- P&L position is the “floating” or “unrealized” profit and loss.
- Every open position carries risk. Traders are exposed to price changes, volatility, and overnight events until the position is closed.
- Successful trading is about managing the open positions, usually by setting clear stop-loss and take-profit orders.
1. What Is Open Position In Trading?
An open position is any trade that an investor has entered but has not yet closed. It means investors are currently holding assets or contracts (like stocks or currencies), and the transaction is not yet complete.
Open position reflects their exposure to the market at the current moment. As long as a position is open, it carries market risk, and its market value can change continuously with price movements.
This is the direct opposite when comparing an open position and closed position. A closed position is a trade that has been completed. Any profit or loss from a closed position is considered “realized” and has been added to (or subtracted from) the account balance.
- Example: If you buy 100 shares of Apple stock and have not sold them, you have an open position in that stock.
Understanding this concept is crucial. It helps investors track the specific performance of each active trade and manage the risk for each of their live investments separately.
2. How Open Positions Work in Financial Markets
An open position is the active part of a trade. It is the time between when a trader enters the market and when they exit. While a position is open, the capital is exposed to market risk, and its value will constantly change. This “floating” value is the Open P&L.
2.1. From Opening a Trade to Closing It
A trade has a simple life cycle:
- Opening: “Open” a position by placing the first order (either a “buy” or a “sell”). The trade is now active.
- Holding: As long as the trade is active, it is an open position. During this time, its value will go up or down with the market. This floating profit or loss is called Open P&L.
- Closing: “Close” the position by placing the opposite trade. The trade is now a closed position. The Open P&L is locked in and becomes the “Realized P&L,” which is added to (or subtracted from) the account balance.
2.2. The Role of Long and Short Positions
An open position can be one of two types, depending on the trader’s prediction:
- Long Position: This is the position initiated when an asset is bought first. A long position is opened because the trader believes the asset’s price will rise.
- Short Position: This is the position initiated when an asset is sold first (often by borrowing it, as in the stock market). A short position is opened because the trader believes the asset’s price will fall.
2.3. Example of an Active (Open) Position
Let’s look at a simple example to understand the open P&L meaning and its calculation:
- Open Position: A trader buys 10 shares of Apple (AAPL) stock at $150 per share. The trader now has an open position.
- Holding (Price Moves): The next day, the market price for Apple rises to $155 per share.
- Open P&L: The trader’s open position now shows a “floating” profit of $5 per share. The Total P&L (Profit and Loss) is +$50 ($5 profit x 10 shares).
This $50 is unrealized. It is not the trader’s money yet. If the price drops back to $150, the open P&L will return to $0. The profit only becomes “real” when the trader closes the position by selling the 10 shares. This is the simple answer to what is open P&L in trading.
3. Key Risks When Holding Open Positions
An open position means the capital is currently exposed to the market. This exposure carries several key risks that every trader must manage.
3.1. Market and Volatility Risk
While a position is open, the market price can move against the trade. If a long (buy) position is held, the price can fall. If a short (sell) position is held, the price can rise.
Sudden volatility (sharp, fast price moves) can also be dangerous. A single unexpected news event or a change in market conditions can quickly erase a floating profit or create a large loss before the trader has time to react.
3.2. Margin and Leverage Exposure
If leverage is used to open a trade, the position faces margin risk. It requires a portion of the account balance to be held as collateral (Used Margin).
If the market moves against the position, the floating loss will decrease account equity. If equity falls below the firm’s required level, a margin call will be received. This may force the trader to either add more money or close the position at a loss.
3.3. Overnight and News Risks
The market is active 24 hours a day, even if traders are not watching. Holding an open position overnight or over the weekend exposes them to “gapping” risk.
Major news (like an interest rate decision or a political event) can happen while traders are away. This might cause the market to “gap” (open at a much different price), potentially skipping over the stop-loss order and causing a larger loss than traders planned for.
3.4. Emotional and Behavioral Risks
Watching the “floating” profit or loss can be difficult. The open P&L is unrealized, which creates emotional risk:
- Fear: Seeing a position in a small loss can cause a trader to panic and close the trade too early, breaking their strategy.
- Greed: Seeing a large floating profit can cause a trader to get greedy and hold the trade too long, only to watch the gain disappear.
These emotional decisions, driven by the stress of an open position, are a major risk to a trader’s discipline and their trading decisions.
4. Why Diversifying Open Positions Matters
Holding only one large open position can be very risky. If that single trade goes against traders, their entire account is at risk. This is why professional traders focus on portfolio diversification.
Diversification means spreading your risk across many different investments.
In trading, this means investors can hold multiple open positions at the same time, but in assets that are not closely related. For example, instead of opening three different “buy” trades on three different technology stocks (which will likely all fall at the same time), a diversified trader might open:
- A long position on a stock.
- A short position on a currency (Forex trading).
- A long position on a commodity (like gold).
The goal is to have a mix of open positions that are not correlated. This way, if one position has a large loss, another position might have a gain, which helps to balance the account and reduce total, overall risk.
5. Managing Open Positions Like a Pro
Professional traders know that opening a trade is the easy part. The real skill is in managing that open position correctly. Here are the key strategies professionals use.
5.1. Use Stop-Loss and Take-Profit Orders
Professional traders never open a position without an exit plan. Before they even click “buy” or “sell,” they define their exit points:
- Stop-Loss Order: An order placed with a broker to automatically close the position at a specific, pre-set price. Its only job is to limit the potential loss. Good traders use stop-losses on almost every trade.
- Take-Profit Order: An order to automatically close the position when it hits a specific profit target.
Using these orders removes emotion and panic from the decision-making process.
5.2. Watch Margin Levels and Floating P&L
It is crucial to monitor the floating (unrealized) gain and loss. The open P&L directly impacts the account’s “Equity.”
If the floating losses (open P&L) become too large, the Equity will fall. As the Equity falls, the “Margin Level” percentage will drop. If this level drops too low, the broker will issue a margin call, which could force investors to close the position at a bad time.
5.3. Avoid Overexposure and Overtrading
A key part of management is controlling the size and frequency of the trades.
- Overexposure: This means risking too much of the account on a single open position. It also means opening too many positions that are highly correlated (e.g., buying three different oil stocks at the same time). If one fails, they all might fail.
- Overtrading: This is the habit of trading too frequently, often out of boredom or trying to “revenge trade” after a loss. Both of these habits dramatically increase the risk.
5.4. Consider Hedging to Reduce Volatility
Hedging is an advanced strategy used to protect an existing open position from short-term volatility. It involves opening a second position that is designed to profit if the first position loses money.
For example, if a trader has a large long position in a stock but is worried about an upcoming news event, they might buy a “put option” as a temporary hedge. This can reduce the overall risk on the account without forcing the trader to close their main position, though it requires great accuracy to execute properly.
6. How Open Positions Differ From Closed Ones
Understanding the difference between an open and closed position is fundamental to trading. The main difference is whether the trade is still active and exposed to risk.
| Feature | Open Position | Closed Position |
| Trade Status | Still active and live in the market. | Completed and finished. |
| Profit/Loss (P&L) | The P&L is “floating” or “unrealized.” The value can still change. | The P&L is “realized.” It has been locked in and added to (or subtracted from) cash balance (Total P&L). |
| Market Exposure | Yes. The capital is currently at risk from market movements. | No. The capital from this trade is no longer at risk. |
In summary, the key difference is risk and finality. An open position is a live bet with a “floating” P&L that is still at risk. A closed position is a finished trade where the gain or loss is final and reflects the ultimate accuracy of the trade.
7. Benefits and Drawbacks of Keeping Positions Open
Holding an open position is the only way to make a profit, but it is also the only way to take a loss. Deciding how long to keep a position open involves weighing its potential benefits against its very real risks.
7.1. Benefits (Pros)
Keeping a position open allows a trader to capitalize on ongoing market opportunities.
- Flexibility to exit at a better price: An open trade allows traders to wait for a more favorable price, rather than being forced to sell immediately.
- Potential for higher profits: Keeping a position open allows investors to ride a trend, which can result in much larger profits than closing the trade too early.
- Usefulness for portfolio balancing: An open position (like a hedge) can be used to offset the risk of another position in the portfolio.
7.2. Drawbacks (Cons)
However, maintaining an open position also comes with significant and constant risks.
- Exposure to market swings: As long as the position is open, it is fully subject to all market swings, including sudden, negative price moves.
- Margin call risk: A losing open position (a negative open P&L) eats into the account equity. If it falls too far, it can trigger a margin call, forcing traders to close the trade at a loss.
- Psychological stress: Watching the money fluctuate with the market causes psychological stress (fear and greed), which can lead to poor, emotional decisions.
8. Open Positions in Day Trading vs. Long-Term Investing
The way a trader manages an open position depends entirely on their trading style. A day trader and a long-term investor look at their active trades in completely different ways, primarily due to their different time horizons and goals.
| Feature | Day Trading | Long-Term Investing (Position Trading) |
| Primary Goal | To profit from small, short-term price movements. | To profit from major, long-term trends (e.g., overall company growth). |
| Position Duration | Intraday (Must close within the single trading day). | Long-Term (Holds for months, years, or decades). |
| Management Style | Very Active (Monitors open P&L constantly, minute-by-minute). | Very Passive (Checks positions weekly or monthly). |
| Main Risk Focus | Immediate, short-term volatility and overnight gaps. | Fundamental, long-term change in the asset’s underlying value. |
| Closing Rule | Mandatory close of all open positions before the market closes. | Intentionally holds positions overnight and through short-term news events. |
9. Frequently asked questions about Open Position
10. The Bottom Line
An open position is any trade that is still active and exposed to market risk. Managing these live positions effectively is the true core of any professional trading strategy.
This means traders must constantly assess their risk, always use stop-loss orders, and avoid over-leveraging to protect their accounts from large, unexpected market moves.
To learn more about specific trading strategies and how to manage your trades like a professional, explore the many other in-depth guides at PipRider.
