There has been a lot of chatter in forums and blog posts by some well-respected people in this industry about the final ruling of the CFTC regarding forex trading for US residents, and I’d like to express my opinion on the matter.
It seems like the leverage restriction has become less of an issue for traders, especially after Japan has already decided to restrict leveraged trading in FX with similar restrictions.
So we’re left with mainly two restrictions that traders for some reason feel limit their ability to trade or make more money than they already make. The restrictions are the good old “FIFO rule” and “No Hedging” rule, which have been in place for US traders for some time now.
A little explanation of these rules and what they mean (or don’t mean) in reality:
The FIFO rule indicates that positions that were opened on a certain instrument (currency pair) have to be closed in the same order. This means that if I open a 1 Lot position on the EUR/USD and an hour later open another 1 Lot position on the EUR/USD, when I want to close a position I have to close the position that was opened first before I close the second position. The perception of traders is that it’s possible that the first position is losing money and the second position opened later is making money. Therefore, if I close my first position I would be booking a loss, whereas if I close only the second position I would be booking a profit and I can keep my eyes closed and say a prayer hoping for the other position to turn around, booking profit there as well. The reality is that it absolutely doesn’t matter which position you close first to the overall P&L, and closing the losing position first and letting the second one run for additional profit is going to get exactly the same result.
The second restriction is the “No Hedging” rule, which means that a trade cannot hold opposing positions on the same instrument at the same time. The rule is a little more forgiving than this, but in reality this is how it’s implemented in most brokers. Some traders are under the impression that they can open a LONG position and then if it goes south open a SHORT position that would balance out the LONG position. In reality opening a SHORT position though enabling the trader to keep his eyes closed and not realize losses on the LONG position is exactly the same as closing the original LONG position and realizing the losses and it doesn’t really matter what the market is going to do next.
So to sum this up, there is no way in the world that hedging and non-FIFO would have any affect (positive or negative) on the ability of a trader to succeed or limit the profitability of a trader – so stop complaining :)
Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results.
Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results. Investor returns may vary from Trade Leader returns based on slippage, fees, broker spreads, volatility or other market conditions.