FAQ: FIFO in the Forex Market

Earlier this week, forex broker Oanda announced that as of May 30, 2011, it will have FIFO trade rules implemented on all its platforms. What the heck is FIFO and how does it affect traders like you and I?

What does FIFO stand for?

first-in-first-out.pngFIFO stands for “first in, first out.” It’s a forex trading policy that complies with the regulations set by the National Futures Association (NFA).

What does FIFO mean in retail forex trading?

As its name implies, under the FIFO policy, a trader is required to close the oldest trades first in the case where there are several open trades on the same pair and of the same size. First in, first out, brah!

Which brokers does FIFO apply to?

Chances are that if your broker falls under the regulation of the NFA, such as Oanda, you’re affected by this. Actually, FIFO is already widely used by stocks and futures platforms, but it’s only recently that forex platforms have come to adopt it (August 2010).

How does FIFO work in our trading?

I think it’s best to explain how FIFO works through an example. Let’s say you want to trade GBP/USD using a scaling in strategy. You enter three long positions on GBP/USD at different times and different entry levels.

Position 1: Bought GBP/USD 100,000 units at 1.6200 entered on June 1
Position 2: Bought GBP/USD 100,000 units at 1.6300 entered on June 2
Position 3: Bought GBP/USD 100,000 units at 1.6400 entered on June 3
Total Position: 300,000 units long in GBP/USD

Now let’s say GBP/USD moved back to 1.6300 on June 4, and you wanted to close 100,000 units of your overall position, more specifically the second position opened at 1.6300. Your broker’s platform won’t allow you.

Under FIFO, the broker has to sell back the first 100,000 units that you purchased at 1.6200 because it was opened first. If you do decide to sell back 100,000 units, you’d end up with Positions 2 and 3 in your trading account.

What if you have multiple trades, but different position sizes?

We’ll take a look at a slightly different example to explain what actions you can or cannot take in this scenario. Take a look at our new example position below.

Position 1: Bought GBP/USD 100,000 units at 1.6200 entered on June 1
Position 2: Bought GBP/USD 75,000 units at 1.6300 entered on June 2
Position 3: Bought GBP/USD 100,000 units at 1.6400 entered on June 3
Position 4: Bought GBP/USD 25,000 units at 1.6400 entered on June 4
Total Position: 300,000 units long GBP/USD

If you wanted to close 25,000 units with a market order, that 25,000 units will be pulled from Position 1 because it is the oldest position.

If you wanted to close 200,000 units with a market order, it will cycle through the oldest trades first, leaving your with 75,000 units in Position 3 and 25,000 units in Position 4.

If you wanted to close Position 4 manually, you can because there are no other positions of the same exact size older than Position 4. The same applies for Position 2.

Position 3 cannot be closed before Position 1. If you try to close Position 3, the platform will inform you that Position 1 needs to be closed first.

Finally, the FIFO rule also affects brokers who allow hedging, or opening opposite positions on the same currency pair. Because of the nature of FIFO, a new position in the opposite direction cannot be established until earlier opposite positions have been cleared out.

Alright folks! That’s it for my short FAQ. If you have any questions, feel free to post it in the comments section. I’ll answer them as best as I can!

  • NathanSamuels

    Hey,

    Nice Information, nice examples too

    Thanks
    Nathan
    First National Innovation Brokers

  • Bee4414

    Does this apply only on the same currency pairs? As in if I have 2 open positions GBP/USD from say June 1st and 2nd and I open 2 positions in EUR/GBP on June 2 and 3rd. Can I close EUR/GBP before closing the other..? 

    • Forex Ninja

      No, it does not. It only applies to the same inventory, or rather, same currency pairs

  • itshamish

    All very well – but one vital fact is missing/

    Why TF???

  • Jess Laventall

    Sorry, I’m a little confused from the first example…

    “Under FIFO, the broker has to sell back the first 100,000 units that you purchased at 1.6400 because it was opened first.”

    But in your example the first position was on 100,000 units purchased at 1.6200 opened on June 1. So wouldn’t that be the first position to close?

    • mscmorris

      Yes, I believe the example is a bit off — poster probably means close the 1.6100 position, since that would be FIFO (rather than LIFO, which is what the example is showing).  I ‘you’d end up with Positions 2 and 3 in your trading account’ is probably more telling.

      • Forex Ninja

        You’re correct. It was a typo. Sorry about that folks.

  • Glenda11

    Forex market maker is a bank or a brokerage firm who is ready, every second trading day with the purchase of companies and prices. This is a great investor because the investor wants to buy or sell a currency pair, the market maker will buy and sell to investors, even if you do not have the buyer and the seller in a row.

    Valutahandel

  • Mrchilled

    To get round this, wouldn’t you just open multiple broker accounts?

    • pon

      I don’t think you need to get around it though, as the FIFO rule really isn’t negative.