In this article, We learn about "First In, First Out (FIFO)".Let's Go!
First In, First Out (FIFO) is a term used in trading to describe the order in which positions are closed.
The name
comes from the way positions are liquidated – the first positions opened are the first to be closed.
In Forex trading, for example, if a trader opens multiple positions in a specific currency pair, when the trader decides to close the position, the position that was opened first will be closed first part of the overall location.
Imagine a Forex trader opening three positions in the EUR/USD currency pair:
If a trader wants to close a position when the price is 1.2500, according to the first-in-first-out rule, the first lot opened (1.1000) must be the lot closed.
Traders cannot choose to close their positions at 1.2000 or 1.3000 before opening their positions at 1.1000.
These rules are particularly strict in certain regions such as the United States, where the National Futures Association (NFA) enforces these rules to protect traders from overexposure to the market.
However, in other jurisdictions, traders may have greater flexibility and can choose which trades to close.
This method changes the way traders manage orders and can influence a trader’s strategy.
For example, it may prevent traders from employing "grid" or "martingale" strategies, which involve opening multiple positions at different price levels.
With the first-in-first-out rule, they must close positions in the order they were opened, which may not be consistent with these strategies.
As with any regulation, the first-in-first-out rule has advantages and disadvantages. On the one hand, it simplifies the order closing process and may limit risk by forcing traders to close their oldest trades, which may be the most vulnerable to adverse market movements. On the other hand, it may limit traders’ flexibility to manage 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 recommended to fully understand the meaning of rules such as FIFO.
If you want to learn more foreign exchange trading knowledge, please click: Trading Education.