In trading, the First In, First Out (FIFO) rule is a common order execution technique that guarantees the first position opened in a trading account is the first one closed when trades are exited.
Particularly when handling several positions of the same currency pair, this rule aids in preserving order and transparency in trade execution.
The name comes from the way positions are liquidated—the first positions to be opened are the first to be closed.
In the United States, FIFO is a regulatory requirement for forex brokers, enforced by the National Futures Association (NFA). Traders must close older trades first before managing newer ones.
The rule is enforced by some regulatory bodies, including the U.S. Commodity Futures Trading Commission (CFTC).
The rule was created to stop traders from using specific kinds of hedging techniques. As a trader, you should be aware of this rule and consider its implications when opening and managing multiple positions in your forex trading accounts.
This approach changes the way traders manage their orders and can influence the trader’s strategy.
For instance, it may deter traders from “grid” or “martingale” strategies, which involve opening multiple positions at different price levels.
The FIFO trading rule is applicable to all forms of trading, including stocks, commodities, and other financial instruments. It is not particular to the Forex market.
In This Post
What Are the 4 Steps of FIFO?
The FIFO method follows these straightforward steps which include:
- Identify the Oldest Trade
Locate the first position opened for the currency pair you are trading. - Close the Oldest Trade First
Execute the closing order for the earliest trade before proceeding to newer ones. - Repeat for Subsequent Trades
Close positions sequentially in the order they were opened. - Update Your Records
Ensure that your trading journal or platform reflects the correct sequence of closed trades.
This structured approach keeps your trades organized and compliant with regulations.
What Is the Formula for First In First Out (FIFO) Method?
The FIFO formula is straightforward:
- Determine the Oldest Entry: Identify the trade with the earliest timestamp.
- Calculate Profit/Loss: Use the following formula:
Profit/Loss = (Exit Price – Entry Price) × Lot Size × Pip Value - Update Account Balance: Adjust your account balance based on the realized profit or loss.
This method ensures you systematically handle trade closures.
How Is the First In First Out (FIFO) Rule Best Implemented?
Implementing FIFO effectively requires:
Trading Discipline: Stick to the FIFO rule when managing multiple positions to avoid confusion or mistakes.
Broker Selection: Choose a forex broker that adheres to FIFO regulations if you’re trading in regions like the U.S.
All brokers have different rules. This means that the techniques that are good for one won’t be of much benefit with another broker.
Similarly, sometimes what works on a demo account, won’t work when you’re trading Forex with real cash.
Automation Tools: Use trading platforms with built-in FIFO compliance features for ease of execution. If you’re using Expert Advisors, you can trade different currency pairs so that you don’t break the FIFO rule. Trading different currency pairs helps you to meet the requirements of trading. It helps you to manage your risk.
Clear Records: Maintain a trading journal to track the opening and closing sequence of trades.
Following these steps ensures smooth compliance and efficient order management.
First In First Out (FIFO) Order Execution Example
Here’s an example to clarify FIFO execution:
A trader opens three trades on EUR/USD:
- Trade 1: Buy 1 lot at 1.1000
- Trade 2: Buy 1 lot at 1.1050
- Trade 3: Buy 1 lot at 1.1100
If the trader wants to close 1 lot, they must first close Trade 1 at its current price. Once Trade 1 is closed, they can proceed to close Trade 2, followed by Trade 3. This sequence respects the FIFO rule.