First In First Out (FIFO)

First In First Out (FIFO) is a term used in trading that describes the order in which positions are closed.

The name comes from the way positions are liquidated – the first positions to be opened are the first to be closed.

In the context of forex trading, for example, if a trader opens multiple positions in a particular currency pair, the position that was opened first will be the first to be closed when the trader decides to close part of the overall position.

Imagine a forex trader who opens three positions in the EUR/USD currency pair:

Buys 1 lot at 1.1000
Buys 1 lot at 1.2000
Buys 1 lot at 1.3000

If the trader wants to close one lot when the price is 1.2500, according to the FIFO rule, the first lot that was opened (at 1.1000) must be the one that is closed.

The trader cannot choose to close the position opened at 1.2000 or 1.3000 before closing the position opened at 1.1000.

These rules are particularly strict in certain regions like the United States, where the National Futures Association (NFA) enforced these rules to protect traders from overexposure in the market.

However, in other jurisdictions, traders may have more flexibility, and they can choose which trades to close at their discretion.

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.

With the FIFO rule in place, they would have to close positions in the order they were opened, which may not align with these strategies.

As with any regulation, FIFO rules can have both pros and cons. On one hand, it simplifies the order-closing process and could potentially limit risk by forcing traders to close out their oldest trades, which may be the most exposed to adverse market movements. On the other hand, it could limit a trader’s flexibility to manage their trades as they see fit.

As always, it is important for traders to understand the regulations in their specific region and how these rules impact their trading strategy.

Before implementing any trading strategy, it is advisable to fully understand the implications of the rules like FIFO.

Related Terms

Stop Limit Order

The Stop Limit Order combines elements of both stop and limit orders to provide traders with more control over their trades.

Limit Order

Limit orders provide traders with the ability to specify a desired price level for entering or exiting a position. This type of order offers greater control over the execution price, allowing traders to minimize slippage and maximize potential profits. What is a Limit Order? A limit order is an order placed to either buy below the market or sell above the market at […]

Binary Options

A binary option is a type of options contract in which the payout will depend entirely on the outcome of a “Yes or No?” or “True or False” proposition. Don’t be intimidated! Its name may sound complicated, but binary options are arguably a simpler way to trade than traditional options or currencies. Just like traditional […]

Order

An order is an instruction to buy or sell on a trading venue.

Forex (FX)

Forex stands for “foreign exchange” and refers to the buying or selling of one currency in exchange for another. While it is called “foreign” exchange, this is just a relative term. The terms “foreign” and “domestic” are relative to the person using the term. What is foreign to someone is considered domestic to another. “Currency exchange” […]