The First In, First Out (FIFO) rule is a regulatory requirement in Forex trading that mandates traders to close their oldest positions first when dealing with the same currency pair and lot size. Enforced primarily by the National Futures Association (NFA) in the United States, FIFO is designed to increase transparency and limit specific trading strategies, including certain hedging techniques. While it provides regulatory oversight, it also restricts traders’ flexibility in managing their positions.
FIFO Rule in Forex Trading
Definition and Purpose
FIFO dictates that traders must close open positions in the order they were initiated. This applies specifically to trades of the same asset, size, and trading account. The rule aims to:
- Ensure orderly execution of trades.
- Prevent traders from using complex hedging strategies that obscure their true exposure.
- Align with broader financial regulations to promote market transparency.
FIFO is particularly relevant in U.S.-regulated Forex accounts, where brokers must comply with NFA rules. However, traders outside the U.S. may not face this restriction, as international brokers often allow hedging.
How FIFO Works in Practice
Example 1: Closing Trades in Order
A trader enters the following positions in EUR/USD:
| Order | Trade Type | Lot Size | Open Price | Close Price |
| 1st | Buy | 1.0 | 1.1000 | 1.1050 |
| 2nd | Buy | 1.0 | 1.1020 | 1.1080 |
If the trader wants to close one lot, FIFO mandates that the first 1.0 lot position (at 1.1000) must be closed before the second. The trader cannot choose to close the second position while keeping the first open.
Example 2: Impact on Hedging Strategies
In jurisdictions without FIFO, traders can open both long and short positions on the same currency pair simultaneously. Under FIFO rules:
- If a trader opens a buy position and then opens a sell position of the same size on the same currency pair, the sell order will partially or fully close the first buy order instead of creating a hedge.
- This restricts traders from using grid trading or similar hedging techniques.
Who Is Affected by FIFO?
Traders Under FIFO Regulations
The FIFO rule primarily applies to traders under U.S. regulatory oversight, meaning:
- Retail traders using U.S.-based brokers must comply.
- Institutional traders are subject to the same restrictions when using NFA-regulated platforms.
- Traders outside the U.S. using offshore brokers are generally exempt.
Impact on Different Trading Strategies
Some trading approaches are heavily affected by FIFO, including:
- Hedging Strategies: Traders who hedge positions within the same currency pair must adjust their approach under FIFO.
- Scalping and Grid Trading: These methods often rely on maintaining multiple simultaneous trades, making FIFO a challenge.
- Trend and Swing Trading: FIFO has minimal impact on traders who hold single-direction positions for longer periods.
Why Was FIFO Introduced?
NFA Regulations and Compliance
FIFO is part of the NFA’s efforts to regulate Forex trading, introduced alongside leverage restrictions and anti-hedging rules. The rationale includes:
- Eliminating trade manipulation tactics that obscure traders’ real exposure.
- Aligning retail Forex with institutional trading standards seen in stocks and futures.
- Preventing excessive risk-taking by retail investors.
Transparency and Risk Management
A key reason for FIFO is to improve market transparency by:
- Providing a clear order execution structure, preventing traders from selectively closing positions for tax advantages.
- Ensuring accurate risk assessment, as FIFO forces traders to close positions in sequence rather than selectively managing individual trades.
However, while these rules protect novice traders from excessive risk, they also limit advanced traders’ flexibility.
How FIFO Rule Affects Forex Traders
Advantages of FIFO
While often seen as restrictive, FIFO has some benefits, including:
- Reduces Overexposure: Prevents traders from accumulating excessive risk through selective position management.
- Regulatory Protection: Ensures compliance with strict U.S. trading laws, reducing the risk of unfair trading practices.
- Prevents Hidden Hedging Costs: Without FIFO, traders might unknowingly pay additional spread and swap fees by maintaining opposing positions.
Disadvantages and Limitations
FIFO comes with several challenges, particularly for traders accustomed to hedging and flexible trade management:
- Reduces Trading Flexibility: Traders cannot choose which trade to close first, limiting strategic adjustments.
- Forces Losses on Hedged Positions: If a trader tries to hedge, FIFO forces the first trade to close, potentially leading to premature losses.
- Incompatibility with Some Strategies: Methods like grid trading, martingale, and layered entries are difficult to execute under FIFO rules.
Does FIFO Apply to All Trades?
The FIFO rule in Forex primarily applies to traders using U.S.-regulated brokers under the jurisdiction of the National Futures Association (NFA). However, there are nuances in how FIFO is enforced, especially concerning trade sizes, broker policies, and specific trading conditions.
Impact on Different Trade Sizes
The FIFO rule strictly applies to positions of the same currency pair and lot size within a single trading account. However, different position sizes may be treated differently, depending on how brokers handle execution:
- Same lot sizes: If a trader opens two 1-lot positions in EUR/USD, they must close the first one before closing the second.
- Different lot sizes: If a trader opens a 1-lot trade and later a 0.5-lot trade, FIFO still applies, but they may be able to partially close positions based on availability.
- Scaling in and out: Traders who build positions gradually must be aware that the oldest trade in the sequence must be closed first, limiting flexibility.
Example:
A trader opens three positions in USD/JPY:
| Trade # | Lot Size | Entry Price |
| 1 | 1.0 | 145.00 |
| 2 | 0.5 | 145.20 |
| 3 | 0.5 | 145.30 |
If the trader wants to close 0.5 lots, the FIFO rule mandates closing the first 1.0-lot trade partially before touching the second or third trades. This can complicate scaling strategies where traders adjust position sizes dynamically.
Exceptions and Broker-Specific Policies
While FIFO applies strictly under NFA rules, some brokers may offer alternative solutions:
- Offshore Brokers: Many non-U.S. brokers do not enforce FIFO, allowing traders to manage positions more freely.
- Proprietary Trading Accounts: Some brokers offer pro-level or institutional accounts that may provide workarounds for large-volume traders.
- Custom Order Types: Certain brokers provide alternative execution methods, such as order-matching mechanisms that allow more flexibility in trade closures.
Understanding your broker’s execution policies is critical, especially if you trade with multiple positions in the same currency pair.
FIFO and Trading Platforms
Different trading platforms implement FIFO in unique ways, which impacts order execution and strategy management.
FIFO on MetaTrader 4 (MT4) and MetaTrader 5 (MT5)
The MT4 and MT5 platforms, two of the most widely used trading terminals, handle FIFO differently:
| Feature | MetaTrader 4 (MT4) | MetaTrader 5 (MT5) |
| FIFO Enforcement | Broker-dependent | Strictly enforced for U.S. brokers |
| Hedging Allowed | Yes (non-US brokers) | No (U.S. brokers) |
| Position Management | Individual orders | Netting system (single cumulative position) |
| Order Execution | More flexible | Follows strict regulatory compliance |
- MT4: Traders using non-U.S. brokers can still hedge and close trades selectively.
- MT5: Designed to comply with FIFO and netting regulations, all trades in the same asset merge into a single position, reducing flexibility for traders under FIFO restrictions.
Differences Between US and Non-US Brokers
The FIFO rule is enforced only by brokers regulated under U.S. law, meaning traders have different options depending on their broker’s location:
- U.S. Brokers:
- Must comply with FIFO, no hedging, and leverage limits (1:50 for major pairs).
- Orders are automatically closed in sequence.
- Non-U.S. Brokers:
- Typically allow hedging and do not enforce FIFO.
- Offer more flexible trade management strategies.
Traders who prefer hedging strategies or manual position management often opt for offshore brokers to bypass FIFO restrictions legally.
FIFO Workarounds and Alternatives
While FIFO limits certain strategies, traders have alternative methods to manage positions more effectively.
Hedging Strategies for US Traders
Since direct hedging is prohibited under FIFO, traders can adjust strategies to achieve a similar effect:
- Using Correlated Pairs: Instead of hedging within the same pair, traders can take opposite positions in correlated assets (e.g., EUR/USD and GBP/USD) to offset risk.
- Options Trading: Forex options allow traders to hedge exposure without violating FIFO rules.
- Futures Contracts: Some traders use currency futures instead of spot Forex to hedge positions outside FIFO regulations.
While these alternatives do not fully replace hedging, they provide ways to reduce directional risk without violating NFA compliance.
Using Multiple Accounts to Manage Trades
Another common FIFO workaround is using multiple trading accounts, which allows traders to execute hedging strategies legally:
- Separate Long and Short Accounts: Traders can open one account for long trades and another for short trades to bypass FIFO restrictions.
- Different Brokers: Some traders use one U.S. broker for compliance and an offshore broker for more flexibility.
- Prop Firm Accounts: Trading through a proprietary firm can provide more flexibility in order execution, depending on their internal policies.
Brokers That Follow FIFO Rules
The First In, First Out (FIFO) rule is enforced by brokers operating under U.S. regulatory frameworks, specifically those governed by the National Futures Association (NFA) and Commodity Futures Trading Commission (CFTC). These brokers are required to apply FIFO when managing trade closures in the same currency pair and lot size.
List of Major Brokers Enforcing FIFO
Traders using U.S.-regulated Forex brokers must adhere to FIFO, as these firms comply with strict trading regulations, including leverage restrictions and hedging prohibitions. Below are some of the major brokers that enforce FIFO:
| Broker | Regulation | Hedging Allowed? | FIFO Rule Applied? |
| OANDA | NFA, CFTC | No | Yes |
| FOREX.com | NFA, CFTC | No | Yes |
| TD Ameritrade (Thinkorswim) | NFA, CFTC | No | Yes |
| IG US | NFA, CFTC | No | Yes |
| Interactive Brokers | NFA, CFTC | No | Yes |
For traders outside the United States, many international brokers do not enforce FIFO, allowing more flexibility in trade management. Offshore brokers under ASIC (Australia), FCA (UK), and CySEC (Europe) typically allow hedging strategies and do not require closing trades in a strict order.
How to Check If Your Broker Uses FIFO
If you’re unsure whether your broker enforces FIFO, consider the following steps:
- Check Regulatory Status: Brokers regulated by the NFA and CFTC are required to enforce FIFO. If your broker is under European (ESMA), UK (FCA), or Australian (ASIC) regulations, FIFO is not mandatory.
- Read the Trading Terms: Most brokers outline FIFO compliance in their terms of service or trading conditions section.
- Test with a Demo Account: Open multiple positions of the same size in a demo account and try closing the second trade before the first. If FIFO applies, the system will prevent you from closing the second trade first.
- Contact Customer Support: Brokers usually clarify their order execution policies upon request.
For U.S. traders who want more flexibility, the best option is to trade with offshore brokers, provided they comply with international regulations and offer strong client protections.
Practical Examples of FIFO Rule in Action
Understanding FIFO in real trading scenarios can help traders adjust their strategies. Below are practical examples of how FIFO affects order execution in different trading situations.
Example 1: Closing Orders on MT4
A trader using a U.S.-regulated MT4 account opens multiple long positions in EUR/USD:
| Order | Trade Type | Lot Size | Entry Price | Close Price |
| 1st | Buy | 1.0 | 1.2000 | Pending |
| 2nd | Buy | 1.0 | 1.2020 | Pending |
If the trader wants to close the second trade (1.2020) first, the FIFO rule prevents it. Instead, they must close the first 1.2000 trade first before closing the second.
Example 2: Managing Trades Under FIFO on MT5
Unlike MT4, MT5 enforces FIFO more strictly because of its netting system, which consolidates positions into a single entry.
Scenario: A trader enters multiple trades in GBP/USD:
- Buy 1.0 lot at 1.3000
- Buy 1.0 lot at 1.3020
Instead of showing two separate positions, MT5 combines them into one 2.0-lot trade at an average price. If the trader wants to reduce exposure:
- Closing 1.0 lot would reduce the position size rather than close a specific order.
- FIFO ensures that the first portion of the trade is adjusted first.
This impacts traders who prefer managing individual trades separately, making position tracking more difficult in a FIFO-enforced environment.
Example 3: FIFO in High-Volume Trading
FIFO can significantly impact scalpers and day traders executing high-frequency trades.
Scenario: A trader executes rapid EUR/USD trades throughout the day:
| Order | Trade Type | Lot Size | Entry Price | Close Price |
| 1st | Buy | 0.5 | 1.2500 | Pending |
| 2nd | Buy | 0.5 | 1.2510 | Pending |
| 3rd | Buy | 0.5 | 1.2520 | Pending |
If the trader wants to exit the third trade first, FIFO prevents it. The first 0.5-lot trade at 1.2500 must be closed first, even if the third trade is in a more favorable position.
This affects traders who:
- Scale into positions gradually.
- Use grid trading strategies with multiple layered entries.
- Need flexibility to close trades selectively based on profit/loss targets.
FAQ
What is the FIFO rule about?
FIFO, or First In, First Out, is a trading regulation requiring traders to close the oldest open positions first when dealing with the same currency pair and lot size. It is enforced by U.S.-regulated brokers under the National Futures Association (NFA) and Commodity Futures Trading Commission (CFTC).
What does FIFO mean in trading?
FIFO means that if you open multiple trades in the same currency pair, you must close them in the order they were opened. This prevents traders from selecting which position to close first, which impacts hedging strategies and trade management flexibility.
What is the 90% rule in Forex?
The 90% rule refers to a common statistic that 90% of retail Forex traders lose money, often due to poor risk management, lack of strategy, and emotional trading. While not an official rule, it highlights the challenges in Forex trading and the need for disciplined money management.
How can we avoid FIFO?
Traders looking to bypass FIFO legally can consider:
- Using Offshore Brokers – Non-U.S. brokers under FCA (UK), ASIC (Australia), or CySEC (Europe) do not enforce FIFO.
- Using Different Accounts – Opening one account for long trades and another for short trades can allow hedging strategies.
- Trading Correlated Pairs – Instead of hedging EUR/USD, traders can open opposite positions in EUR/GBP and GBP/USD for a similar effect.
- Using Futures or Options – Currency futures and options are not subject to FIFO, providing alternative hedging opportunities.