What is FIFO? 

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FIFO stands for ‘First in, First Out’ and is an execution policy which complies with regulations laid out by the National Future Association. As the name suggests FIFO requires that traders close the oldest position first in cases where a trader has opened several positions of the same size in a particular currency pairing. Some trading platforms will automatically net your positions in order to comply with FIFO (Currenex, MetaTrader with netting plugin), while other trading platforms will simply reject orders that are not in compliance with FIFO rules.

Who does FIFO apply to?

FIFO rules apply to all retail brokerages regulated by NFA in the United States, but it is not only US based brokerages which require that traders to comply with FIFO.  US Citizens therefore have no choice… A number of European brokerages also operate with a ‘First in, First Out’ policy, with European Forex brokerages such as HY Markets, JFX and CMC Markets all use FIFO rules despite not being required by European regulators to do so.

How does FIFO work?

It is hard to explain how FIFO works without providing a few examples. Many traders like to scale in and out of positions. Our particular trader places three 1 Lot trades in the EUR/USD at three different entry points as so:

Position 1: Buy 1 Lot (100,000 notional) @ 1.3600 on the 1st of September

Position 2: Buy 1 Lot (100,000 notional) @ 1.3601 on the 2nd of September

Position 3: Buy 1 Lot (100,000 notional) @ 1.3602 on the 3rd of September

Total Position: Long 3 Lots (300,000 notional) in the EUR/USD

If the trader had been using a platform which automatically netted his positions, the three separate long positions in the EUR/USD would be netted into one long position. However if a trader was using a platform which did not perform the netting automatically and this particular trader only wanted to close out a third of his total position (1 lot) he would be required to close the first position which he opened on the 1st of September. Essentially FIFO requires that older positions are closed before newer positions.

The situation is more complicated when a trader has opened multiple different size positions in the same currency pairing. In our second example our trader has again gone long in the EUR/USD but this time has varied position size.

Position 1: Buy 0.25 Lots (100,000 notional) @ 1.3600 on the 1st of September

Position 2: Buy 0.75 Lots (75,000 notional) @ 1.3601 on the 2nd of September

Position 3: Buy 1 Lot (100,000 notional) @ 1.3602 on the 3rd of September

Position 4: Buy 0.25 Lots (25,000 notional) @ 1.3603 on the 4th of September

Total Position: Long 3 Lots (300,000) in the EUR/USD

If our trader wanted to close out 0.25 Lots of his total position again this amount would come off his first position, so position 1 would now be 0.75 Lots or 75,000 notional. The situation will be more complex when our trader wants to close 2 Lots of his total position.  In such a situation position 1 and 2 would be closed first accounting for 1.75 lots, while a total of 0.25 would be taken off position 3 leaving our trader with 1 lot still open. Again it should be clear that older positions are closed before newer positions according to the first in, first out principle.

Conclusions

FIFO can make it more complicated when a trader wants to close a position and certainly makes it more difficult for those who like to scale in and out of positions. FIFO does however prevent hedging strategies which is why it is unpopular with some traders, those outside of the United States will be able to choice whether they trade with a brokerage that operates according to FIFO.

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