FIFO decides which lot an exit applies to. Without it a trader can close whichever entry suits the tax or reporting outcome; with it the queue is fixed and the oldest entry is always the one that goes.
It changes how scaling works. A trader who adds to a winner cannot later trim only the newest, worst-priced entry: the exit takes the original lot and its result. Strategies built on managing individual entries separately have to be redesigned around one net position, as noted under nfa-compliance-rule-2-43.
Platforms handle it by hiding per-entry tickets or by rejecting a close on a specific ticket. metatrader accounts at US brokers run in netting mode for this reason, which is one of the reasons MT5 exists alongside MT4.
Example: long 1 lot of EUR/USD at 1.0800, then another at 1.0900. Price is 1.0950 and you close one lot. FIFO closes the 1.0800 entry for a 150-pip gain and leaves the 1.0900 entry open, whatever your intention was.
Related: nfa-compliance-rule-2-43, position-netting, hedging-mode, metatrader