diff --git a/hgext/lfs/__init__.py b/hgext/lfs/__init__.py
--- a/hgext/lfs/__init__.py
+++ b/hgext/lfs/__init__.py
@@ -25,14 +25,15 @@ becomes burdensome.  However, the pre an
 not be able to communicate with each other unless the extension is
 enabled on both.
 
-To start a new repository, or add new LFS files, just create and add
-an ``.hglfs`` file as described below.  Because the file is tracked in
-the repository, all clones will use the same selection policy.  During
-subsequent commits, Mercurial will consult this file to determine if
-an added or modified file should be stored externally.  The type of
-storage depends on the characteristics of the file at each commit.  A
-file that is near a size threshold may switch back and forth between
-LFS and normal storage, as needed.
+To start a new repository, or to add LFS files to an existing one, just
+create an ``.hglfs`` file as described below in the root directory of
+the repository.  Typically, this file should be put under version
+control, so that the settings will propagate to other repositories with
+push and pull.  During any commit, Mercurial will consult this file to
+determine if an added or modified file should be stored externally.  The
+type of storage depends on the characteristics of the file at each
+commit.  A file that is near a size threshold may switch back and forth
+between LFS and normal storage, as needed.
 
 Alternately, both normal repositories and largefile controlled
 repositories can be converted to LFS by using :hg:`convert` and the
@@ -240,29 +241,19 @@ def reposetup(ui, repo):
 def _trackedmatcher(repo, ctx):
     """Return a function (path, size) -> bool indicating whether or not to
     track a given file with lfs."""
-    data = ''
-
-    if '.hglfs' in ctx.added() or '.hglfs' in ctx.modified():
-        data = ctx['.hglfs'].data()
-    elif '.hglfs' not in ctx.removed():
-        p1 = repo['.']
-
-        if '.hglfs' not in p1:
-            # No '.hglfs' in wdir or in parent.  Fallback to config
-            # for now.
-            trackspec = repo.ui.config('lfs', 'track')
+    if not repo.wvfs.exists('.hglfs'):
+        # No '.hglfs' in wdir.  Fallback to config for now.
+        trackspec = repo.ui.config('lfs', 'track')
 
-            # deprecated config: lfs.threshold
-            threshold = repo.ui.configbytes('lfs', 'threshold')
-            if threshold:
-                fileset.parse(trackspec)  # make sure syntax errors are confined
-                trackspec = "(%s) | size('>%d')" % (trackspec, threshold)
+        # deprecated config: lfs.threshold
+        threshold = repo.ui.configbytes('lfs', 'threshold')
+        if threshold:
+            fileset.parse(trackspec)  # make sure syntax errors are confined
+            trackspec = "(%s) | size('>%d')" % (trackspec, threshold)
 
-            return minifileset.compile(trackspec)
+        return minifileset.compile(trackspec)
 
-        data = p1['.hglfs'].data()
-
-    # In removed, or not in parent
+    data = repo.wvfs.tryread('.hglfs')
     if not data:
         return lambda p, s: False
 
diff --git a/tests/test-lfs.t b/tests/test-lfs.t
--- a/tests/test-lfs.t
+++ b/tests/test-lfs.t
@@ -984,27 +984,28 @@ Bad .hglfs files will block the commit w
   > ** = size(">10B")
   > EOF
 
-The LFS policy takes effect as the .hglfs file is committed
+The LFS policy takes effect without tracking the .hglfs file
 
   $ echo 'largefile' > lfs.test
   $ echo '012345678901234567890' > nolfs.exclude
   $ echo '01234567890123456' > lfs.catchall
-  $ hg ci -Aqm 'added .hglfs'
+  $ hg add *
+  $ hg ci -qm 'before add .hglfs'
   $ hg log -r . -T '{rev}: {lfs_files % "{file}: {lfsoid}\n"}\n'
   2: lfs.catchall: d4ec46c2869ba22eceb42a729377432052d9dd75d82fc40390ebaadecee87ee9
   lfs.test: 5489e6ced8c36a7b267292bde9fd5242a5f80a7482e8f23fa0477393dfaa4d6c
   
-The existing .hglfs file is used even when it is not in the 'A' or 'M' states
+The .hglfs file works when tracked
 
   $ echo 'largefile2' > lfs.test
   $ echo '012345678901234567890a' > nolfs.exclude
   $ echo '01234567890123456a' > lfs.catchall
-  $ hg ci -qm 'unmodified .hglfs'
+  $ hg ci -Aqm 'after adding .hglfs'
   $ hg log -r . -T '{rev}: {lfs_files % "{file}: {lfsoid}\n"}\n'
   3: lfs.catchall: 31f43b9c62b540126b0ad5884dc013d21a61c9329b77de1fceeae2fc58511573
   lfs.test: 8acd23467967bc7b8cc5a280056589b0ba0b17ff21dbd88a7b6474d6290378a6
   
-Excluding the .hglfs file from the commit postpones the policy change
+The LFS policy stops when the .hglfs is gone
 
   $ hg rm .hglfs
   $ echo 'largefile3' > lfs.test
@@ -1012,17 +1013,7 @@ Excluding the .hglfs file from the commi
   $ echo '01234567890123456abc' > lfs.catchall
   $ hg ci -qm 'file test' -X .hglfs
   $ hg log -r . -T '{rev}: {lfs_files % "{file}: {lfsoid}\n"}\n'
-  4: lfs.catchall: 6747cfb1b83965b4a884e7a6061813ae31e4122028bc6a88d2ac5e5f9e05c5af
-  lfs.test: 3f40b70c2294e91e0fa789ebcf73c5a1d1c7aef270f83e477e40cb0513237e8c
-  
-The policy change takes effect when the .hglfs is committed
-
-  $ echo 'largefile4' > lfs.test
-  $ echo '012345678901234567890abcdef' > nolfs.exclude
-  $ echo '01234567890123456abcdef' > lfs.catchall
-  $ hg ci -qm 'file test'
-  $ hg log -r . -T '{rev}: {lfs_files % "{file}: {lfsoid}\n"}\n'
-  5: 
+  4: 
 
   $ cd ..