If you wish that you could implement Forex hedging with a US Forex broker and not have to follow the FIFO rule, then this post is for you. There are ways to legally get around both of these restrictions, if you do a little advanced planning.
Before I get started, please read this entire post, especially the warning at the end. These are advanced tactics and definitely not for beginners! Even if you are an advanced trader, I would not recommend using these tactics unless you have a clear strategy that you have tested and you are comfortable with.
Doing this is actually pretty simple and if you thought about it long enough, you probably would have come up with this on your own. But if you haven’t, then keep reading because I will show you exactly how I do it.
If you still don’t believe that this is possible, then I have also included a video demonstration. As you know, things may change over time and this may not work at a later date. So if you are interested in doing this, be sure to test it in a demo account before you use it in live trading.
What do FIFO and Hedging Mean?
If you are new to trading, let me explain these two concepts really quickly. Here are the informal definitions for each term:
- Hedging: Holding both long and short positions for the same currency pair, in the same account.
- FIFO: Stands for: First In First Out. If your broker is required to adhere to FIFO, then for each currency pair, they must make you close out your oldest trades before you can close out trades that you opened more recently.
Traders in the United States have to adhere to these rules, per US law. These laws were created because allowing hedging and non-FIFO trading can be confusing, especially to new traders.
But if you are a more advanced trader and can handle these more complex trades, there is still something you can do about it.
How to Forex Hedge in a US Based Account
Hedging Forex trades is actually quite easy, just open two different accounts…one for longs and one for shorts. The key to doing this safely is to remember which account is which. If the balance one account gets low and the other starts racking up profits, just transfer money between the accounts to balance them out.
Make sure that your broker allows you to transfer money between accounts. I don’t see why this would be a problem, but you never know.
My broker is Oanda and by using their Java trading platform, I can open one account in one browser like Firefox and use another browser like Safari to open another instance of the trading platform and have the other account open at the same time. Because I need to keep all of the longs in one account and all of the short in the other account, having a different background color for each account helps me keep track and reduces order entry errors.
Here is an example:
How to Get Around FIFO and Forex Hedging
Just like with hedging, we are still subject to certain rules, but if you know the workarounds, you can take advantage of them. The process does take a bit of advanced planning, but it works great.
I don’t mind so much that you cannot hedge, because I don’t do it. But I am really against the FIFO rule.
To me, it does more harm than good. But that is almost irrelevant because I know how to get around it.
The trick is to use different sized lots. The rules state that if a previously entered position is of a different size than later positions, it is not subject to the FIFO rules.
Since Oanda allows nano lots (which is awesome because it significantly reduces your risk, especially in small accounts), you can enter different lot sizes without it significantly impacting your risk.
Here is what I mean…
For example, the smallest lot size most brokers allow you to enter are micro lots, which are 1,000 currency units. However, since Oanda allows nano lots (1 currency unit), you can enter a second position at 1,001 units and a third position at 1,002 units.
Because they are all different position sizes, you are allowed to exit the 1,001 unit position and the 1,002 position before the 1,000 unit position.
You just have to do some advanced planning when it comes to your order entry. Break down your positions into unit sizes that you want to incrementally exit.
So if you have a total position size of 10,000 units, you may want to exit at 1,000 unit lots, so you would have to enter 10 separate positions to allow for smaller exit sizes.
Keep in mind that if these are sell orders and you accidentally enter a buy order for that pair in that account, it will still subtract those units from the oldest open position. So in our example with the three positions, if you accidentally bought 100 units, it would be subtracted from the 1,000 unit position, giving 900 units after the mistake.
Here is what it would look like with the first two positions:
When Hedging in Forex Doesn’t Work
The hedging workaround should work for most brokers, but test it out in a demo account before you proceed.
Do not make any assumptions.
There are some brokers and platforms for which the FIFO workaround doesn’t work. In fact, there are probably a lot of brokers where it doesn’t work.
For example, when I looked at the proprietary FXCM trading platform, they blend trades together and they do not allow nano lots, so you could not use this method.
Even if they did allow nano lots, instead of having two positions of 1,000 units and 1,001 units (like with Oanda), you would have one position of 2,001 units at the average entry price. So even if you did only want to exit the second 1,001 unit trade, you wouldn’t be getting the entry price for that first order. The entry price would be the average of both positions.
Let’s take a look at a (very) simplified example…
If you entered the first 1,000 unit short position at 100.00 and the second 1,001 position at 105.00, you would have a total blended position of 2,001 units with an average price of 102.50. If the current price is now 104.00, you could not exit the 1,001 unit position at a 100 pip profit.
Any exit of this position would incur a 150 loss.
When we are forced to take off the oldest position first, there is no opportunity to take some profit off the table on the more recent trades and wait for the older position to become profitable. Yes, it is true that blending and not blending positions is theoretically the same thing at the point in time when a partial position is closed out.
But in reality (the case above, for example) it would show up as losses on our P/L when it could have been a profit.
The bottom line is that if you want to do this, be sure to test out a demo account with a prospective broker first. There is no use in going through all the trouble to register and fund an account, only to find that your broker blends positions or does not allow different position sizes.
Also keep in mind that your position size might not require nano lots. If you are trading 100,000+ unit positions, an extra 1,000 unit micro lot might not make much of a difference to you and you might still be able to use this technique.
It’s all relative.
Don’t Believe Me? Here’s Forex Hedging and non-FIFO Trading in Action
Alright, check out this video and I will show you how this works in more detail.
A Final Word of Caution on Hedging Forex and the FIFO Rule
Although I don’t agree with the US laws on hedging and FIFO, they are designed to protect traders from themselves because hedging and managing multiple positions can get complicated real quick. They are advanced strategies and should only be implemented after you have a firm grasp of the basics and actually have a trading system.
Even then, these strategies may not work with your systems and your personality.
So the bottom line is that just because you now know the workarounds, it doesn’t mean that you should use them. Again, these methods may not work with all brokers.
Always test your ideas in the lab and in a demo account first!
What do you think? Do you use hedging? Has FIFO messed you up before?