What is the Stacking Rule?
The stacking rule is designed to limit the number of open positions you can have in the same direction and for the same instrument. Specifically, you are allowed to have a maximum of two trades open in the same direction for the same instrument. Exceeding this limit is not allowed and will result in a hard breach.
Breaking Down the Rule with Forex Examples
Let’s look at how it applies to forex trading with a few practical examples to better understand the stacking rule.
Example 1: Trading the EUR/USD Pair
Scenario 1: You open two sell trades on EUR/USD.
Scenario 2: You decide to open a third sell trade on EUR/USD.
NOT ALLOWED: now there are more than 2 positions in the same direction on the same instrument open.
Example 2: Trading the GBP/JPY Pair
Scenario 1: You open two buy trades on GBP/JPY.
Scenario 2: You decide to open a sell trade on GBP/JPY.
ALLOWED: no more than 2 positions are open in the same direction on the same instrument.
Example 3: Trading the GBP/USD Pair
Scenario 1: You open two buy trades on GBP/USD.
Scenario 2: You decide to open a sell trade on GBP/USD.
Scenario 3: You open another buy trade on GBP/USD.
NOT ALLOWED: now there are more than 2 positions in the same direction on the same instrument open.
Keep in mind that the rule applies to all instruments, not just forex pairs.
What About Other Trading Scenarios?
While the stacking rule limits the number of trades in the same direction for the same pair, it allows flexibility in other areas:
Different Directions: You can have multiple positions in opposite directions. For instance, if you have two sell trades on EUR/USD, you can also open two buy trades on the same pair without violating the stacking rule.
Different Pairs: You can trade multiple pairs simultaneously. For example, you can have two sell trades on EUR/USD and also open two buy trades on GBP/JPY without issue.
Different Trade Sizes: The rule focuses on the number of positions, not the size of each position. Therefore, having two sell positions of varying sizes is acceptable as long as the total number of positions in the same direction does not exceed two.
Why Is the Stacking Rule Important?
The stacking rule helps manage risk by preventing overexposure to a single market direction and currency pair. It encourages traders to diversify their positions and avoid concentrating their risk, which can lead to significant losses if the market moves unfavourably.
Conclusion
Understanding and adhering to the stacking rule is crucial for maintaining a balanced and risk-managed trading approach. By limiting the number of open positions in the same direction and for the same forex pair to two, traders can better manage their exposure and make more informed trading decisions. Remember, while the stacking rule sets boundaries, there is still ample flexibility to explore different trading strategies and opportunities.