Stop Loss policy under new NFA rules
The National Futures Association (NFA), our industry’s self regulatory organization in the United States, has informed all Forex Dealer Members, that it has adopted new Compliance Rule 2-43(b) regarding Forex trading.
The rule requires orders be executed First In, First Out (FIFO).
if you have three different positions:
#1 BUY 10K EURUSD @ 1.3000, target (limit order 1.3500)
#2 BUY 10K EURUSD @ 1.2800, Target (limit order 1.3000)
#3 BUY 10K EURUSD @ 1.2700, Target (limit order 1.2800)
you will not be able to close #3 with the limit order once 1.2800 is reached, but instead #1 will be closed.
This FIFO rule soon found a flaw – stop loss orders available at brokers’ trading platforms, which allowed placing stops on individual tickets on the same currency pair and be executed as soon as price reaches a specified level. Filling stops at requested price for multiple positions that are held in the same currency pair became impossible with FIFO rule, which says that a position which was first opened must be the first to close.
As a result, regular stops the way traders know them will no longer be allowed with NFA brokers, instead,
entry orders should be used for stop-loss and limits after July 31, 2009 as follows:
For Buy Positions: Placing an entry order to sell below the price where you got into the position protects you
from additional losses. Placing an entry order to sell above the price where you got in locks in profits.
For example, if you have a BUY EUR/USD position at 1.3900, you could place:
a stop-loss using a sell entry order at 1.3800
a limit using a sell entry order at 1.4000.
For Sell Positions: Placing an entry order to buy above the price where you got in protects you from additional
losses. Placing an entry order to buy below the price where you got in locks in profits.
For example, if you have a SELL EUR/USD position at 1.3900, you could place:
a stop-loss using a buy entry order at 1.4000
a limit using a buy entry order at 1.3800.
New rules like this is all a part of regulating the Forex market in order to ensure fair and ethical business between parties. It makes trading less one-sided, and forces risk management to be put in the forefront of clients minds to help protect them. We would always recommend that you choose a broker that is certified by a regulatory body.