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Wednesday, July 13, 2011

FXCM TradeStation II platform FX FINREG NFA Hedging FIFO


The July 10th FIFO changes required by Frank(en)Dodd Kinda freaked me out. FXCM had to "do their best" I suppose to implement the changes in their trading software.

However it is my own opinion that all brokers in the United States and under the authority of the NFA will be doing exactly the same thing forex traders will be doing. Which is to find a way(s) to use new Frank(en)Dodd FINREG rules to their advantage. Brokers have an advantage over us in this matter since they write the software that we use to trade the market.. Talk about conflict of interest.. jeeze..

Lets briefly look at the overall picture of rules changes we, forex traders in the USA, have seen from FINREG..

All of the new rules affected me personally.

First we saw the banning of the ability to hedge our positions in the FX market. I never liked or used hedging much myself as I never really found an effective way to do it. I'm not saying that there aren't effective ways to use it just that I, as a shorter term trader, never seemed to find them.

However it still pissed me off that the government of the United States of America was thrusting themselves into my business and telling me what I could and could not do in the forex market. I don't like that so I simply moved my forex account offshore, to the UK, still using my current broker, FXCM.

(BTW, you can still "hedge" pretty effectively by using two reverse correlated pair if you want, it's not really that difficult).

Then the second FINREG rule hit me.. It banned all offshore forex trading for all United States citizens. I was forced to switch my account BACK to the United States as my broker was forced to comply with this new rule. This pissed me off too because it's supposed to be MY money and MY life and who gave the government the authority to tell me where I am allowed to trade forex?!

So, none-the-less, my account was forced back to the USSA (United Socialist States of America).

So now the third new FINREG rule that is affecting me and my trading is the new FIFO rule.

This new rule is requiring brokers to make significant changes to their existing trading platforms.

I talked to FXCM's twitter representative about these new rules and possible work around scenarios. (If you use twitter and trade forex on FXCM you should definitely follow @JasonForex. IMHO Jason is a great guy, very helpful. IMHO Jason is likely the VERY BEST thing about FXCM LMAO)

At any rate the way FXCM has implemented the new FIFO rule is to "ask" traders to use the summary tab to manage their trades. The summary tab groups any all positions you might have in the same pair. Also available on the summary tab are new selections to set "net" stops and "net" limit orders to manage your open trades.

I found this to be confusing as you also have the ability to set individual stops / limits on market orders and limit entry orders before entering the market. However those stops / limits, after entering a trade, cannot easily be seen at all anywhere on the system. That in itself was causing some of my trades to close unexpectedly as I had placed stops / limits on them before opening them and then after entering the market those are reflected no where. I assumed they would show up in the "net" stop on the summary tab as an average stop but they do not. In fact the two stops / limits seem to be entirely independent of each other, sort of.. It turns out that the first stop or limit encountered will take precedence over a secondary stop.. This situation occurs if you have set a stop / limit on a market order or limit entry order and also have set a "net" stop on the summary tab. I find it very easy to get lost in the stop / limit options here. Obviously FXCM, and I'm sure all NFA regulated brokers, had to make hasty, likely not fully tested, changes to their trading platforms to comply with these new FINREG NFA rules. I'm sure the changes will be will be more cosmetically hidden in the future with subsequent software releases.

Maybe you like the new "net" stop / "net" limit on the summary tab as implemented by FXCM.. I don't, period.

The way I normally try to trade is to scale into a position. Normally my first entry will be my worst entry and my last entry will be my best entry. This means that FIFO should actually work in my favor, or at least not affect my trading too much, because I also scale out of trades normally worst entry out first, to reduce risk on the overall trade, and so on. Which most of the time should pretty much match FIFO.

What was bothering me was the confusion over stops. AND the fact that the "net" stop selection on the summary tab will NOT allow you to lock in profits on a trade OR close out individual positions within a trade! It REQUIRES your stop be a LOSS on your net position to accept it as a valid entry! That quickly became my biggest concern personally as we all know how difficult it can be at times just to hold onto forex gains ;) It also operates on the entire trade rather than separate entries.

Due in large part to the ineptitude of our regulators via Frank(en)Dodd and FINREG it turns out to be pretty easy to find a workaround for these changes by playing one FINREG rule against another. Sort of..

The no hedging rule can be used to effectively manage stops & limits on individual entries. Though the FIFO (first in, first out) rule will still apply.

Lets use an example here to try to clarify how this works..

Say we buy USDCAD 4 times in an attempt to build a long position (full disclosure, this is a current trade I am in).

1st entry 0.9663

2nd entry 0.9658 (too close I know..)

3rd entry 0.9638

4th entry 0.9613

By the time we get to the last entry at 0.9613 I'm under water on the overall trade pretty far so I want to protect myself from extreme risk due to volatility, and just plain being wrong on the trade, by putting a stop loss on at least some of my exposure.

The way the no hedging FINREG rule works in combination with the new FIFO rule is if you are long a pair and enter the same pair short it will close the first long you entered (due to FIFO rule). Knowing this I entered a limit sell order on USDCAD at 0.9603 (10 pips below my last / best price entry. (I think the dollar may pop as market risk increases). I also entered a 2nd limit sell order at 0.9593 which will act as a stop loss on my second (worst) entry ie; 0.9658.

When / if these limit sell orders execute they will act as stops and close my first 2 long entries (unfortunately for considerable losses).

Using this same technique you can also easily set stops which will lock in gains on an open position in the black which is now difficult if not impossible to do on FXCM's platform.

The same technique can be applied to limit orders to take profits as well. In the example of my USDCAD longs I have a limit sell order at 0.9663 which will, currently, close my 2nd entry (1st entry already went on 0.9603 stop) at 0.9663 or +5 pips, reducing risk. In this case I also have a limit sell order at 0.9693 which, currently, would apply to my 3rd entry for a gain of some 55 pips. My profit target on the final position is not set as yet (eyeing at least 0.9773) and I currently have no stops on the last 2 long entries.

Using these techniques allows you to still have fairly fine control over your trades on the FXCM trading platform. The most serious drawback is management of stops / limits.

If you manually close a position during a trade and have (loosely speaking) associated entries as stops limits you MUST be very diligent about keeping up with these as they will still exist after you manually close a position.

If I had a stop & limit on each of my (currently) 3 USDCAD long positions that would require 6 separate limit sell orders one each as a stop and one each as a limit.

So IF you want to try this technique do so at your own risk and be very diligent about managing your stops / limits when used in this manner.

8 beers late in the evening is no excuse for failure to do so ;)

IMHO the worst thing about the new FIFO rule is that it makes it impossible to scalp in the same direction in the middle of a good trade. ONLY in the United States of America! But I suppose we should blame congress for that and not our brokers..

For the record, so far I hate every single new FX Frank(en)Dodd FIN-f'ing-REG rule..

IMO regulators are most often (captured) BASTARDS!

Happy pipping to all and I sincerely hope this might have helped someone at least a little.



  1. I agree with your issue with trading on an offshore account. They really should have no business in telling you if you can do that.

  2. Good post. Fully Agree

  3. Thanks for the comments

    To me it seems like every new Fran(en)Dodd rule / regulation will end up helping banks / brokers more than retail traders. But really nothing too surprising about that lol