Introduced in 2009, the rule removed a practice where retail clients held a long and a short in the same pair simultaneously. Regulators viewed it as economically meaningless once spread and rollover were paid on both legs, while giving the impression that a losing trade had been neutralised rather than closed.
Under the rule a new opposite-direction order in a pair you already hold offsets the existing position instead of opening a second one. Combined with the fifo-rule, the oldest lots are closed first, so a trader cannot choose which specific entry to exit.
The practical consequence for strategy is that grid and hedging systems designed for hedging-mode platforms simply cannot run on a US account; they must be rewritten to work with a single net position.
Example: long 2 lots of USD/JPY, then sell 1 lot. In a US account you are left long 1 lot with the older lot closed and its result realised. On a hedging account you would instead hold 2 long and 1 short.
Related: fifo-rule, hedging-mode, position-netting, retail-fx-dealer