Trading Forex with the New FIFO Rule
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Recently, the National Futures Association instituted new rules about hedging and first in first out (FIFO). This changes the way that many people will engage in forex trading in the future. For those who use stop loss orders, it might be difficult to effectively do what is needed, since the new ruling insists that the first trade open must be the first trade closed. Kirk Norwood, from Forex Strategy Secrets, explains the FIFO rule, and how to get around it in forex trading:
This means the first trade in needs to be the first trade closed if you have more than one trade on the same currency and with the same lot size. The key here is the lot size. If you are going to add on to a trade and want to use Stops as we teach, you can still do this but you have to change the lot size. If you have a 1.0 lot trade on, the rest of the trades on that currency pair need to have a different lot size i.e. 1.0 lot, 1.01 lot, 1.2 lot, 1.02 lot, etc. As long as the lot size is different you can use the stop loss principle.
This is an important distinction. The use of stop loss orders when trading forex can be a good way to limit your losses in many cases. By observing the proper method of entering positions, you can ensure that you automatically exit them as desired.
Another change is to hedging. A direct hedge can no longer be used when trading forex. However, it is possible to get around this by using a three currency method, instead of a two currency method. For example:
- Buy dollar while shorting the sterling.
- Buy sterling while shorting the euro.
- Buy the euro while shorting the dollar.
It’s a round about way of getting there, but you make it eventually.
Disclaimer: I am not an investment professional. Nothing in this piece or on this Web site should be construed as investment advice. Before making investment decisions, do your own research and/or consult with an investment professional. All investment comes with the risk of loss. You are responsible for your own investment decisions and any loss that may result from your decisions.
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