What is FIFO?
FIFO. "First In, First Out" (FIFO) is an accounting phrase for queued things. This convention determines a forex broker's closing order. All currency pair positions are liquidated in order.
"LIFO"—Last In First Out—is the opposite. This convention would clear the final item first for all positions. FIFO works best in most circumstances. Sorting programs use LIFO more.
Forex trader. I traded with assetsfx.org. However, their trading terms don't apply to FIFO. FIFO's role in forex trading and whether it's worth it are crucial. I'm investigating FIFO trading in this article.
Let’s strat….
FIFO Rule
"First In, First Out" is FIFO. It underpins Rule 2-43b, issued by the National Futures Association (NFA) in May 2009. Traders must close the first deal before opening another of the same pair and size under the FIFO rule. All NFA-regulated US brokers are affected.
Forex Trading: How Does FIFO Work?
An example helps us understand the FIFO rule in forex trading. Using a scaling technique, you open three long trades on GBP/USD at three distinct timings and entry levels.
Position 1:
Opened a 100,000-unit GBP/USD long position at 1.6000 on February 1.
Position 2:
Opened a 100,000-unit GBP/USD long position at 1.6100 on February 2.
Position 3:
Opened a 100,000-unit GBP/USD long position at 1.6200 on February 3.
Total positions:
GBP/USD 300,000.
If the GBP/USD returns to 1.6100 on February 4th and you sell 100,000 units of your entire position, the FIFO rule requires you to close the 100,000 units you bought at 1.6000 in your first order. The broker won't let you close the 100,000 units you opened at 1.6100 in your second position.
The same rationale applies if you have many currency positions of different sizes. See the example.
Position 1:
Opened a 100,000-unit GBP/USD long position at 1.6000 on February 1.
Position 2:
Opened a 25,000-unit GBP/USD long position at 1.6100 on February 2.
Position 3:
Opened a 100,000-unit GBP/USD long position at 1.6200 on February 3.
Position 4:
Opened a 75,000-unit GBP/USD long position at 1.6300 on February 4.
Total position:
GBP/USD 300,000.
Since Position 1 is your oldest position, the FIFO rule requires you to close 25,000 units with a market order from it. If you use a market order to close 150,000 units, the number will be picked from the oldest deal first, leaving 75,000 units in Position 3 and Position 4.
Because you don't have additional positions the same size, you can manually close Positions 2 and 4. The platform will tell you to manually close Position 3 after closing Position 1.
Hedging requires closing the first position before creating a new one with the same trading size and currency pair, therefore, FIFO applies. The broker won't let you open opposing positions on the same currency pair. If you have an open long position in GBP/USD, you can't initiate a new short position on the same pair and size until you close the long position.
Which brokers use FIFO?
Oanda, an NFA-regulated broker, may influence you. FIFO is utilized by stocks and futures platforms, although forex platforms have recently adopted it (August 2010).
Why choose first-in, first out?
- Easy to understand.
That's how shares are sold.
- Be hands-off.
We'll automatically sell the oldest shares first.
FIFO benefits:
The first-in-first-out (FIFO) inventory valuation method provides certain benefits for business:
The FIFO method saves time and money by determining the inventory's precise cost based on the most recent cash flows of purchases.
Easy to understand. Without much explanation, a layman can understand. Managers without accounting knowledge could understand it.
FIFO is useful because it solves the problem of identifying product costs at the point of sale.
It is a common valuation method that improves comparability and consistency.
FIFO policy eliminates uncertainty about cost of sales values in profit/loss accounts, making financial statement revenue manipulation impossible.
FIFO increases gross and net profits as goods prices rise.
Sales cost = opening stock + purchases – closing stock.
Due to inflation, first inventories will cost less than subsequent inventories, hence profits reported will be larger.
FIFO drawbacks:
FIFO inventory valuation has these main drawbacks:
FIFO valuation for inventory/stock increases profits and "Tax Liabilities" during inflation. Tax payments may increase.
"Hyper inflation" may make FIFO unsuitable. In such times, inflation might skyrocket. In such circumstances, combining most earlier purchases with most recent sales may affect profitability.
If materials/commodities acquired have variable pricing patterns, FIFO may misrepresent earnings for the same period as varied costs of the same goods are recorded.
The FIFO pricing valuation method is easy to understand, but it requires a lot of data, which can lead to clerical errors.
Like all pricing methods, FIFO is predicated on inflation. This oversimplifies the computation of costs, which may include the effects of many other variables including supply and demand, transfer pricing, foreign exchange movements (for overseas purchases), etc. Inventory valuation must take into account all relevant elements.
Conclusions
The FIFO rule prohibits traders from opening numerous positions of the same currency pair that could offset each other and prohibits price adjustments to execute client orders unless to resolve a complaint in the client's favor. Finally, the rule restricts the straight-through processing of transaction changes. The NFA must examine, approve, and document all changes.
The government's FIFO rule regulates the forex market to ensure fair and ethical business between traders and trading firms. Regulators want to make internet trading safer and less one-sided by safeguarding retail traders.
US traders who know how to earn from hedging strategies can legally circumvent the FIFO rule. Keep in mind that these approaches are complex and may not work for every broker.
Therefore, master the basics, establish a good trading strategy, and test them in a demo account before spending real money.