There has been a practice among less experienced traders to hold a long and short position without closing the position out. The idea is that the positions are hedged and the trader will lift one leg (usually the profitable one) and then seek to at least breakeven on the remaining open leg.
As far as I am concerned the moment you have a long and short of the same size in the same instrument you have closed out the position. When the trader purported to lift a leg, he was actually instituting a fresh position on the purported close out.
For example a trader buys and sells 1 June contract at 300. The market moves to 310 and the trader purports to lift the long leg at 310. When the market moves down to 300, he ‘closes the short leg’ at 300 for no loss and a profit of $10.00 on the position.
That’s the fiction. The reality is the first hedge is a close out. The sell at 310 is a new short that makes $10.00 at the 300 buy.
Well folks, on May (corrected) 15 a new ruling by National Futures Association comes into effect - New Compliance Rule 2-43(b) - that effectively prohibits the practice of hedging. In short if you go long and short at the same time, you will have no position.
For those that are unaware, The NFA now regulates US brokers and the CFTC is responsible for regulating Forex trading. Between the two agencies, Forex brokers are now regulated entities in the USA. Now if only the US would provide compulsory insurance for FX brokers….!
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