FIFO trading involves closing positions in the same order in which they were originally opened. You’ve probably noticed that these rules are in place on the platform that you use for Forex trading. That’s because the National Futures Association (NFA) requires them.
FIFO trading rules govern several Forex platforms. These rules let brokers meet NFA standards.
How does FIFO trading work?
FIFO trading requires you to close your first trades first. You’ll always close the oldest trades first. The platform that you are using won’t allow you to do otherwise.
Traders want to stick to the rules that their brokers set. Similarly, brokers wanted to ensure that they’re following the rules that have been set by the regulatory body in their country. Brokers must pay attention to FIFO rules in the United States.
Brokers apply this rule when you have several open positions on the same currency pair. The trades should also be the same size. So, the first trade that you entered must be the first one that you close.
So, suppose you open three different tRades on three different days on the same currency pair and all of them are the same size. For example, you open trades on Euro/US dollar on Monday, Tuesday and Wednesday and all of them are the same size. You might decide that you want to close the one that you open on Tuesday. Your broker won’t allow you to do that. They have to follow the FIFO rule. You’ll have to close the trade that you opened on Monday first.
Even your take profit points will be affected by the FIFO rule. Some traders use robot trading to help them save time. This also lets them benefit from opportunities in the global Forex market.
For example, they set their profit points and then they can comfortably sleep while benefiting from opportunities in markets overseas. However, because of FIFO, sometimes their positions don’t close at the take profit points, even though they generate a profit.
NFA Compliance Rule 2-43b
NFA rule 2-43b is the rule that traders are speaking of whenever they refer to the rule. It was implemented within the US Forex industry by the sector’s self-regulatory organization. That organization is the National Futures Association or NFA.
The NFA says that the rule protects traders. Essentially, it prevents traders from hedging in Forex. Traders who hedge take a long and short position on the same currency pair. They do that simultaneously, so that the trades offset each other.
The stops dealers from letting traders hedge. All brokers are required to offset multiple positions by using the FIFO rule. As long as the positions are in the same currency pair, dealers must close the first trades first.
FIFO Rule Limits Price Changes
The rule also protects traders in another way. It blocks dealers from making price changes to orders. They can’t make price adjustments to an executed order. However, they can make an exception. Dealers can change the price if that resolves a complaint in the client’s favor.
Rule 2-43b was implemented in 2009. The top three brokers in the US follow the FIFO rule. Traders in the United States should also follow this rule. Traders who aren’t in the US don’t need to follow the rule. That’s because they’re outside the NFA’s jurisdiction.
So, futures commission merchants must follow the rule. Introducing brokers also have to use FIFO. Commodity trading advisors and retail foreign exchange dealers also follow this rule.
Brokers that facilitate FIFO trading have matching features on their platforms. So, all platforms that existed before 2009 were adjusted so that they met the requirements of rule 2-43b.
Traders can’t freely choose orders to close out. You can still place stop orders. Traders can also place limit orders. However, you can’t input those orders in the same way that you would prior to the change.
Does FIFO apply to open trades of different sizes?
FIFO doesn’t technically apply with trades of different sizes. The open trades all have to be the same size. For example, all of your open trades will have to be 10,000 units for the FIFO rule to apply.
If you have three open trades and the first one is 10,000 units, the second one is 15,000 units and the third one is 10,000 units, you can’t close the third one before the first one. However, you could close the second one before the first manually. This would be so even if all three are for the same currency pair.
This is one way in which traders can work around the rule. For example they can make slight changes to the size of each trade that they have open. When they open positions with that in mind, they can manually close any one that they want to, without worrying about which one was opened first.
The work around only functions as you want it if you close the trades manually. If you set up Expert Advisors with MetaTrader, or you have a market order in place, the first position is always the oldest position. This will block you from closing some of your positions automatically, once you’re using a broker that uses FIFO trading rules.
Does your broker use FIFO trading?
If your broker is in the United States, they probably use FIFO. The rule applies to all Forex brokers in the United States.
The National Futures Association NFA requires all Forex brokers to follow this rule. If a broker doesn’t follow this rule, they could end up in problems with the NFA. US brokers don’t want that. They want to be in good standing, so they follow the rule.
The FIFO rule helps traders. It protects their capital. However, traders who like to hedge with opposing positions find it difficult to trade with this rule in place. Despite that, there are a few minor adjustments that you can make to stick to the rules and benefit from your strategy.
Does FIFO trading only apply to the Forex market?
FIFO trading doesn’t only apply to the Forex market. So, stock brokers use FIFO trading. Similarly, futures brokers use FIFO. However, now many Forex brokers have adopted FIFO trading.
If you use a broker outside of the US, FIFO trading rules won’t necessarily apply. This is why some US traders look for other brokers. They don’t use US brokers because of the FIFO rule. However, you should be careful about doing this.
Remember that brokers in the US must stick to regulations. If they don’t, they’ll lose their licenses. This means that you have more protection for your capital.
How do FIFO trading rules affect traders who use EAs?
Several traders use Expert Advisors to save time. Some use more than one expert Advisor at a time. In fact, when they become comfortable with using them, they may use as many as 10 Expert Advisors simultaneously.
If you’re using Expert Advisors with MetaTrader, you should be careful about the lot size. If you have open trades with multiple Expert Advisors and they all have the same lot size, the rule will apply. That is, the first trade that you opened must be closed first. Traders can’t close any other positions first.
If you’ve gotten accustomed to trading with a particular lot size, it may be hard for you to change. For example, all of your trading strategies may work best with a particular lot size. In addition, some brokers don’t allow you to have nano lots.
Some traders are very particular about their Expert Advisors. It’s not simple to change the lot size on that type of strategy. In that case, you won’t want to make any changes to that. A size change could decrease your profits.
If you’re using Expert Advisors, you can trade different currency pairs so that you don’t break the FIFO rule. Trading different currency pairs helps you to meet the requirements of trading. It helps you to manage your risk.
FIFO doesn’t stop you from benefiting by using portfolio trading. However, you should plan your portfolio of Expert Advisors carefully. Despite that, trading with a portfolio is harder than trading with a single Expert Advisor because of FIFO.
Traders should implement their strategies as safely they can. If you’re using a broker that only allows FIFO trading, and you want to use a portfolio of strategies, you may need to look at trading different currency pairs.
FIFO Trading Prohibited On MT5
Several Forex brokers offer MT4 or MT5. Some of these brokers are based in the US, so they only allow FIFO trading. In that case, if you’re using the MT5 platform and you try to close another position before the first one, you will get an error message. This says that the FIFO rule prohibits the action you want to take. When you get that message, you need to sort your positions according to the time that you opened them. When you find the oldest position, you should close it first.
You usually get that problem with MT5. MT4 is the platform that was developed before the FIFO rule. That is, it was not required for Forex brokers to close the oldest trade first when MT4 was the only product available from MetaTrader.
The new feature on MT5 has made it unpopular among retail traders. For this reason, some brokers only offer MT4. If you’re using MT5 you can’t hedge on the same pair. You can open positions on different currency pairs.
MT5 has a few features with make it hard to work around the FIFO rule with the same account. However, there are some brokers that will allow you to open more than one trading account and use MT5. In this way, you can have opposing positions with the same currency pair.
You’ll meet up on a few blocks if you only have one account and you try to open multiple positions on the same currency pair. Your orders will merge automatically. So, MT5 will put all your positions into one order. That satisfies both the FIFO rule and the rules that prevent hedging in Forex.
Check your Broker’s Rules
All brokers have different rules. This means that the workarounds that are good for one won’t be of much benefit with another broker. Similarly, sometimes what works on a demo account, won’t work when you’re trading Forex with real cash.
For example, on a demo account you might use a wider range of lot sizes than you would with real cash. You shouldn’t do that. Test your strategy on the platform in the demo version, just as you would in the live version.
If you plan to stick to a specific lot size with real capital, that’s the lot size you should use with your demo account. If you do that, you’ll be notified right away if you’re violating the FIFO rule with your demo account. That way, you’ll know immediately if the broker only allows FIFO trading.
Conclusion
Some traders try to work around the rule by opening two accounts at the same broker. They always go long on one account. However, they make sure that they always go short on the other account. They also transfer funds from one account to the other.
That strategy only works at some brokers. Some brokers don’t allow you to have more than one account some brokers also don’t allow you to transfer funds between multiple accounts.
Earlier in this article you learned that it’s sometimes possible to work around the FIFO rule by opening trades of different lot sizes. That workaround doesn’t function as you might want it to at all brokers. That’s because some brokers will merge your orders. When they do that, they calculate the average price for the entire lot.