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New Forex Hedging Rules

By May 6, 2009

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The NFA set forth new regulations for US forex brokers. The new rule is in two parts, with one being the most talked about.

The first part of rule 2–43 is specifics and limits on how forex brokers can adjust customer orders. The rule basically eliminates arbitrary adjustments made by forex brokers.

The second part of the rule is in regards to offsetting transactions, better known as forex hedging. The rule basically eliminates the ability of forex brokers to offer hedging to their customers. It also requires forex brokers to use a rule called FIFO, or first in first out. That means that if you place two buy orders on EUR/USD with the first lot being placed at 1.30 and the next one being placed at 1.3050 and you place a sell order at any price. The broker is required to close your first order at 1.30.

The basic reason that the NFA wants to regulate against hedging is because they are asserting that inexperienced traders are disserviced by the offering of full hedging because they don’t understand it. Often new traders end up incurring additional expense in the form of spread and more often than not, they are still losing money.

You can read the full text of the rule at the NFA web site. The rule goes into effect May 15, 2009.

 

Comments
May 6, 2009 at 3:52 pm
(1) Meena says:

This new rule is nonsense. I am an active forex trader and hedging is a very valuable stategy for me. Whe themarket goes against my main position I open a hedged position instead of stop loss. This protects my margin and I close the hedge for a profit when the price again turns back to the main trend. If I am completely wrong in my analysis my loss is limited to the difference between the two positions. I am a short term trader so I don’t worry about rollovers. I am moving my account to a London based dealer. At least so far their regulators aren’t overregulating.
I think this is a show by the NSA. So they can be seen as “regulating forex.”
Without being able to use hedging my investments are but into greater risk and my profits are reduced…

May 18, 2009 at 2:20 pm
(2) Event Trading says:

Meena, you’re correct that this rule is nonsense. So is “hedging.” The so-called hedge takes you out of the market, until you choose a direction. Eventually you must close one of those positions. A losing position is still a loss, no matter how you cut it. What everyone is missing is the “opportunity cost” involved. While you are hedged out of the market, waking up to a 400 point move that you missed doesn’t look so hot.

November 25, 2009 at 1:34 pm
(3) Rich says:

This rule is rediculous!!!!

For example: Lets say I am in a long position EUR/USD trend trade. I am in it with 2 lots at 10% of my account. I have been in this trade for a couple days.

Then I notice a set up for a EUR/USD scalping trade against the trend. I want to trade 1 lot at 20% of my account.

Before the stupid rule I was able to have both trades going on. The trend trade was able to go against me as every trade does from time to time but I am able to profit from pull backs by scalping the pullback.

The new rule means that I will have to enter and exit trades more resulting in paying for more pip spreads since I will be partially or fully taken out of my trend trade once executing a scalping trade.

It also means that I will have to pay careful attention to re-enter my trend trade when closing out my scalping trade.

The people who made up this rule or back it are obviousely not sophisticated traders and do not have the best interest of other traders in mind.

Rich

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