If you trade using USA brokers such FXCM or OANDA you got message in your trading platform “prohibited by fifo rule” or “mt4 hedge is prohibited”. Prohibited by fifo rule means The First in First Out’ and it is the rule in forex trading.
Many years ago, I gave one example in this website Prohibited by fifo rule and it is problem that I need to solve in mt4 platform. Now, here are more details and everything you need to know about fifo forex rules.
If you’re a forex trader who is planning to involve handing with a Forex broker based in the United States and you’re required to abide by the rules under FIFO. You must read this article carefully from the beginning to the close. Many ways and techniques are there – when you understand and put them to work, it will help you deal with issues under these restrictive rules. For this, you need to plan on a priority basis.
Forex traders have traded and opened a number of positions on the same currency pair ever since Forex trading started. However, considering the business conditions, many industry watchers believe that the Forex market is likely to implement rules similar to the futures and stock market, implementing the First In First Out (FIFO) rule for forex traders. Though there may be some resistance initially, it is likely a majority of the forex brokers are likely to agree to implement this rule because of the huge losses they are facing due to the null positions adopted by a large number of forex traders.
FIFO compliance and NFA
What is FIFO?
The First in First Out’ is the rule in forex trade. It requires as per the norms under the regulation of the National Futures Association (NFA). According to the rule, the first order has to be finished first if a customer has over one open trade of the same pair of forex and amount.
Don’t get overwhelmed. It’s simple and easy to execute. You could plan and build your star. If you think this not credible, you can refer to the demo account. Experience shows things keep on changing during a span of time and this is unlikely to work at a later date. And, as a matter of proof about the extent of success, you can create a demo account prior to venturing into live trade.
Be aware that you are not permitted to hedge forex; because of this traders do not favor FIFA. They would rather prefer it to go. In this context, it’s also important to what hedging is.
Therefore, It’s also important to define hedging and explain it.
Since the fifo rule is being discussed many traders would like to get more information. The United States accepted the FIFO rule for stock market brokers in 2009 according to the National Futures Association (NFA). According to this rule, the investor or trader will first have to close the oldest positions they have opened first , when the trader is having multiple traders of the same pair and size. Hence, all brokers regulated by the NFA will have to ensure that they and their traders are complying with this policy. The fifo rule in forex ensures that investors do not keep open positions for a currency pair, while finalizing other trades for the same currency pair. This ensures that the market is active and remains volatile since the fluctuations are reduced due to open positions. The FIFO rule hopes to reduce the problems caused by open positions, so that forex trading is profitable and there is no stalling.
How the FIFO principle works
It is easier to understand how the FIFO rule will be implemented using an example. A trader wishes to invest in USD/EURO currency pair by scaling. Hence the trader will go long on the three positions at different times, and also entry levels. In the position taken first, position 1, trader purchased USD/EUR Forex futures at 1.3004, the second position the trader chose 1.3001, and in the third position the trader purchased at the level of 1.3007. If the USD/EUR level reaches 1.3005, the trader wishes to close the second position since his profit will be more. However under the new rules of NFA and FIFO, this will not be possible. Under the new fifo rules, the trader will have to sell the position 1 first, and the other positions in the same order in which they were purchased. Every investor will have to comply with this new FIFO rule for trading in forex.
Understanding why the FIFO rule was implemented
The main reason why it was necessary to implement the FIFO rule was because the volatility in the market was reducing. A large number of traders were keeping their trades open for many days, their position was stagnating decreasing the volatility. The currency volumes traded each day also reduced. Hence to overcome these problems, the Forex tradings new FIFO rules were implemented. Forex experts believe that this will positively impact the Forex market in the long term. The rule is already implemented for the stocks, futures market, and it will also help forex trading. Any broker can provide more information on this rule and other aspects of forex trading.
Hedging involves a set of ways to secure your investment from the harmful effect resulting from the adverse movement of a pair of currencies.
If you’re a trader in the United States, you have to abide by the rules associated with hedging and FIFO. Don’t get confused if you’re a newbie in the market. And, don’t indulge in things prohibited by FIFO rule.
As you gain experience, it will be easy for you to understand and even predict the movement to some extent. Of course, if you’re an experienced trader and have gone forward, you will be able to tackle the situation easily.
How to forex hedge in a US based account?
When a foreign currency such as the US dollar wildly fluctuates, it is sensible to obviate the high risk involves as much as possible. The benefits of forex hedge in a US-based account is that you’re unlikely to lose money if the other currency in your investment drops.
Hedging forex is in reality simple. To make it easy for you, create two different accounts. The objective is to ensure safety and you must remember which account is for what. If one of the accounts does not do well, the other makes profits. You need to keep remove the money from one account to another to reach the desired balance between the accounts.
In this context, you should also consider account that the broker you are linked to let you to perform the inter-account money removal.
If you work with a USA brokerage such as OANDA or FXCM, the job described in the preceding paragraphs becomes easy. On the Java platform of OANDA, access one of your accounts on one browser such as Google, use Firefox to open the forex trading platform. Ensure you open both the accounts simultaneously. You should keep all the logs in one of the accounts and all the sorts in the second account. The background color should be different so that you can differentiate between them easily. It also helps you minimize the errors in the entry of orders.
Get Around FIFO Rule
How to deal Forex Hedging and FIFO
In this context, you need to work under the purview of rules. If you are familiar with the modalities of the market, it will be easier for you to comprehend. Of course, you must have the competence to plan everything, which is likely to help you immensely.
Many people dislike rules under FIFO. If you don’t wish to hedge, it’s fine. To many people, FIFO rules don’t accrue benefits. However, if you know how to deal with the situation under IFO, it will be easier for you.
The way to deal with it easily is to use lots of different sizes. In such an instance, if the earlier lot is different in size from the one that comes later, FIFO rules don’t apply.
As OANDA or FXCM brokers let nano lots, you can use the lots in different sizes without having to come under the purview of rules under FIFO. The nano-sized lots enable you to mitigate the risk significantly. This is particularly true in the case of small accounts.
When does hedging forex fail to work?
The strategies, methods, can work for any forex broker. However, it’s sensible to check it out using a demo account before you move forward.
Be warned not to take anything for granted.
In certain cases of platforms and brokers where the FIFO is not compatible, it will not work. There are many brokers who are unable to work in the FIFO tech environment.
For instance, problems such as when you’re working on the FXCM platform, all the trades overlapped and this does not let lots of nano. In such a case, you cannot use a FIFO strategy.
A simple example
To start with, you worked with 1,000 units of currency at 100.00 and second lot with 1,001 at 105.00 the total number at blended position is 2001 and the average price at 102.50. If the price as of now is 104.00, you cannot remove the 1,001 units at a profit of 100 units. If you exit, you will have to bear a loss of 150 units.
When you work under the stringent rules of FIFO, odds are few to divert part of the profit earned. To realize an amount of profit, the best thing to do is to wait until the older position becomes profitable.
So if you intend to realize a profit, remember to test it with a demo account that you created with your broker. You don’t have to be registered and pay for an account. In such a case, you will be giving undue advantage to the broker who does not let the position sizes work properly.
A word of caution
Of course, you may or may not like FIFO norms and hedging forex rules, they are all meant to protect the interest of traders like you against the onslaught of other traders. This is important because dealing with multiple positions can lead to a complex situation. So, don’t commit things that are prohibited by the FIFO rule.
They are all strategies and you should take into consideration to implement them when you are clear with the fundamentals and are familiar with the platform and rules, etc. However, the strategies may not work with the system and your typical personality.
Therefore, remember not to use the various methods and techniques – you should not apply them all because they may not work well. You should take caution and move forward.