Swing Trading Strategies & Stock Picks Since 2003

A couple of weeks ago I posted on the new NFA rule which effectively bans the practice of “hedging” in the retail forex market. There’s been considerable discussion on the subject of hedging and several notable brokers have given their customers the opportunity to allow them to shift their accounts to jurisdictions outside the US to permit those who wish the ability to continue hedging.

One of the parts of this new rule (2-43) that I didn’t initially focus much on is the FIFO (first-in, first-out) requirement. Some disucssion about it, however, It’s made pretty clear:

Forex Dealer Members may not carry offsetting positions in a customer account but must offset them on a first-in, first-out basis. At the customer’s request, an FDM may offset same-size transactions even if there are older transactions of a different size but must offset the transaction against the oldest transaction of that size.

This FIFO requirement means that you can no longer chose which position you close if you have more than one trade open. If you are long and sell the broker will offset the earliest part of the long first. For example, if you bought a lot of EUR/USD at 1.3000, then later bought another lot at 1.3050, then sold a lot at 1.3100, the initial 1.3000 lot would be the one offset.

I do not “hedge” so the no carrying of offsetting position doesn’t phase me or most forex traders. The FIFO thing, though, is something which will impact a lot of folks. Basically it will mean that you won’t be able to close specific trades (stop or take profit) out of the sequence in which they were entered. Most forex brokers currently allow you to put a stop and/or take profit right on a specific position. This will not be permissible anymore under the new rule because they will be required to close your first trade before closing any others.

Now, if all you do is trade a single trade at a time, this my not be that big a deal. It depends on how you work. What it seems likely to require, however, is having to put on seperate stop and take profit orders. This may seem fine, but consider a situation where you’re away from your computer and your stop gets hit, then later the take profit order is hit. You’d end up with a position you’d never intended. This is solved by setting up a One-Cancels-Other (OCO) order, but not all brokers do that at this point. Hopefully they will be pressured into changing that now.

I’ve spoken with someone at FXCM on this issue. It’s one they (and I’m sure all others) are working hard to figure out.

I’ve said from the start that this new NFA rule is just about getting retail forex in line with other markets like stocks and futures - standardizing the accounting for trades and positions. This FIFO thing is just doing that. I’ll admit it creates a bit of a shift in the mechanics of putting orders in and such, but if you’ve ever traded stocks, futures, or any other markets then it won’t be unfamiliar.

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