Questions about CFTC anti-hedging and FIFO

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Hello,

I'm a new trader. Most of my background is in programming and software engineering. I have been working with Forex demo accounts for about three months now and am getting fairly close to finishing an ea using mt4.

As a US trader I am influenced by the CFTC rules, specifically anti-hedging and FIFO. My questions for the community are:

1) Is it considered a hedge if you open several orders in the same direction (buy only, or sell only) on the same instrument?

2) As a US trader are there any legal ways to trade without a FIFO restriction?

Any input on FIFO is welcome, thanks.

 
paysonwelch:
Hello,

I'm a new trader. Most of my background is in programming and software engineering. I have been working with Forex demo accounts for about three months now and am getting fairly close to finishing an ea using mt4.

As a US trader I am influenced by the CFTC rules, specifically anti-hedging and FIFO. My questions for the community are:

1) Is it considered a hedge if you open several orders in the same direction (buy only, or sell only) on the same instrument?

2) As a US trader are there any legal ways to trade without a FIFO restriction?

Any input on FIFO is welcome, thanks.

1) No, hedging is opening positions in different direction of the same financial instrument. It gives rise to arbitrage. In other words, it stickle executing, e.g., triangular arbitrage.

2) Yes, there are some ways:

(a) start-up a financial trading firm outside your country (e.g. Brazil, India, Singapore) and operate as a firm;

(b) hire someone outside your country (from, e.g., Brazil, Israel, Uruguay) who can open an account giving you "power of attorney" so that you can operate in his/her name and make a contract with this person in order to guarantee your assets;

(c) "invest" your money in a capital management firm outside your country which executes the same strategy you're wiling to execute.

This tends to be hard for small traders due to initial and operational costs.

 

For now the best and quickest way for US citizens to bypass the FIFO, NO-Hedging and 1:50 leverage is.

Ask a friend or relative outside the US to open an account for you, I think even Canadians are immune to to CFTC so you could use a Canadian friends account or maybe someone from Europe.

Then Trade under your friend or relatives account.

BTW.

NO-HEDGING = you cannot put a buy as well as a sell trade on the same instrument

FIFO = if you execute a trade you have to close that trade before you open a new one on the same instrument

1:50 Leverage = You need Double the margin for executing a trade, for example to execute a 1.0 Lot trade, it will take $2000 as margin.

Best Regards,

Nims

 

Hello paysonwelch!

I work at FXCM on the Programming Services team, and we often encounter this complication. For US based traders, typically the easiest solution for coding EA’s is to only allow it to have one trade at a time. This avoids any FIFO or hedging issues.

Also, to clarify, Hedging is when you hold a long and a short trade in the same instrument at the same time. This is unfortunately prohibited in the US.

FIFO simply requires the oldest trade in one currency pair to be closed first. Here’s an example to illustrate:

All trades are BUY EUR/USD trades:

10K buy last Monday

20K buy last Tuesday

30K buy last Wednesday

You now have a net 60K buy position in EUR/USD

Now, if you want to close one of the trades, you must close the 10K Monday trade first, then 20K from Tuesday, and finally 30K from Wednesday. If, however, you haven’t closed anything (e.g. still have 60K buy EUR/USD) and you want to close 20K, you would be closing all of Monday’s trade and 10K of the 20K from Tuesday. Let’s say you’ve done that, so now you have 40K remaining (10K from Tuesday and 30K from Wednesday). If you want to buy another 60K, that’s absolutely fine, you would then have 100K buy EUR/USD. Let’s say tomorrow you want to close half of the total position (50K), that would be 10K from last Tuesday, 30K from last Wednesday and 10K from yesterday (the 60K trade). That would leave you with 50K buy EUR/USD. In summary, FIFO only restricts which trade must be closed first; it doesn’t prohibit you from opening trades in the same direction as your current position.

Broker’s systems usually take care of this for you, however it’s always a good idea to speak with your broker and confirm how they respect the FIFO regulations. (For those who use EA’s that track ticket numbers, keep in mind that ticket numbers can change in certain situations, depending on the action taken by the EA or user).

I hope this helps! Best of luck trading to everyone!

Brad

 
Brad Bonds:
Hello paysonwelch!

I work at FXCM on the Programming Services team, and we often encounter this complication. For US based traders, typically the easiest solution for coding EA’s is to only allow it to have one trade at a time. This avoids any FIFO or hedging issues.

Also, to clarify, Hedging is when you hold a long and a short trade in the same instrument at the same time. This is unfortunately prohibited in the US.

FIFO simply requires the oldest trade in one currency pair to be closed first. Here’s an example to illustrate:

All trades are BUY EUR/USD trades:

10K buy last Monday

20K buy last Tuesday

30K buy last Wednesday

You now have a net 60K buy position in EUR/USD

Now, if you want to close one of the trades, you must close the 10K Monday trade first, then 20K from Tuesday, and finally 30K from Wednesday. If, however, you haven’t closed anything (e.g. still have 60K buy EUR/USD) and you want to close 20K, you would be closing all of Monday’s trade and 10K of the 20K from Tuesday. Let’s say you’ve done that, so now you have 40K remaining (10K from Tuesday and 30K from Wednesday). If you want to buy another 60K, that’s absolutely fine, you would then have 100K buy EUR/USD. Let’s say tomorrow you want to close half of the total position (50K), that would be 10K from last Tuesday, 30K from last Wednesday and 10K from yesterday (the 60K trade). That would leave you with 50K buy EUR/USD. In summary, FIFO only restricts which trade must be closed first; it doesn’t prohibit you from opening trades in the same direction as your current position.

Broker’s systems usually take care of this for you, however it’s always a good idea to speak with your broker and confirm how they respect the FIFO regulations. (For those who use EA’s that track ticket numbers, keep in mind that ticket numbers can change in certain situations, depending on the action taken by the EA or user).

I hope this helps! Best of luck trading to everyone!

Brad

Very good and informative post.

Thanks Brad

 

You are welcome alanfx! I am glad that the information was helpful to you. Please let me know if there are lingering questions and I’ll do my best to help!

Brad

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