Forex FIFO (First In, First Out) is a trading rule that requires traders to close their oldest trades first in case of multiple trades in the same currency pair. This rule was introduced in the United States in 2009 by the National Futures Association (NFA) to prevent hedging and increase transparency in forex trading.
According to the FIFO rule, if a trader has multiple open positions in the same currency pair, the oldest position must be closed first before the next position can be closed. This means that traders cannot close a newer position with a profit while keeping an older position with a loss open.
For example, if a trader has two open positions in EUR/USD – one bought at 1.1000 and the other sold at 1.1050 – and decides to close the sold position with a profit, they must first close the bought position at 1.1000 even if it is currently at a loss.
The FIFO rule applies to all forex brokers in the United States and affects all traders, including those outside the US who trade with US-based brokers. Failure to comply with the FIFO rule can result in penalties and even account suspension.
What happens if SL?
SL or Stop Loss is an order placed by a trader to automatically close a trade at a predetermined price level to limit potential losses. In case of the FIFO rule, if a trader has multiple open positions in the same currency pair with different stop loss levels, the oldest position with the closest stop loss level to the current market price must be closed first.
For example, if a trader has two open positions in EUR/USD – one bought at 1.1000 with a stop loss at 1.0900 and the other bought at 1.1050 with a stop loss at 1.1000 – and the current market price is 1.0950, the oldest position with the stop loss at 1.0900 will be closed first, even if the other position with a wider stop loss is at a larger loss.
This means that traders must be cautious when placing multiple trades in the same currency pair with different stop loss levels, as the FIFO rule can affect their risk management strategy.
In conclusion, Forex FIFO is a trading rule that requires traders to close their oldest trades first in case of multiple trades in the same currency pair. This rule aims to prevent hedging and increase transparency in forex trading. Traders must comply with the FIFO rule to avoid penalties and account suspension. Stop loss orders are affected by the FIFO rule, and traders must be cautious when placing multiple trades in the same currency pair with different stop loss levels.
