What is an Exchange Rate & Foreign Exchange Market?

  • Exchange Rate & Foreign Exchange Market:

What is an Exchange Rate?

Excange rate refers to that rate or price of a country currency at which we measure the value of one country’s currency to the other country’s currency. In other words a price at we calculate that how much units we need of one currency so that we can buy one unit of other currency.Exchange rate is made up of two words Exchange + Rate. Exchange is a term where we subsitute one thing to another, and rate is one kind of ratio where differ units are calculated or compared for two terms. For example $20 made in 5 hours that is rate. 

  • Lets take an example of Exchange rate:

$1 = 72 

One usd is equal to seventy two rupees means we need 72 rupees so that we can buy 1 USD in other words 72 units of rupees we need to exchange with 1 unit of dollar.

Now the main question is that who determine the exchange rate?

That is foreign exchange market which determine the exchange rate.Later in this topic we are gonna talk about foreign exchange market deeply along with it we will cover Foreign exchange market participants subject also in that topic. So stay connected and lets take a look on differ types of exchange rate they are as follows:

  • Different types of Foreign Exchange Rate:

Flexible Exchange Rate System:

Flexible Exchange Rate System totally based upon the term “Flexible” There will be no involvement of the govt in this exchange rate system.This is called as an Floating Exchange Rate System also. Exchange rate will depend upon the market forces which is demand and supply system of the market. If supply of the product is high demand will be less and if demand is high for the product supply will be less. Rate its not fixed and if today USD dollar is $72 tomorrow it can be USD $71 also depend totally upon market demand and supply.

Fixed Exchange Rate:

Fixed Exchange Rate System totally based upon the term “Fixed” where there will be not much changes in exchange rate. This is an exchange rate where prices will be determined by the govt. A pegging system can be seen in fixed exchange rate where govt bind its domestic country currency to other country’s currency. For example Euro/Usd Gbp/Usd etc.

Merged Exchange Rate:

The need of Merged Exchange Rate system can be seen in the market when condition is not seeming good at all means to say it is a combination of both Flexible & Fixed Exchange Rate system. Whenever there is something wrong in the market with Flexible Exchange Rate system. For example a nonstop price deceleratation in a currency. 

  • What is Foreign Exchange Market?

Foreign Exchange is a worldwide online market where buyers and sellers or market participants join to buy and sell currencies or exchange currencies. According to trading volume its one of the largest financial market in the world and trillions of dollar’s traded everday in foreign exchange market. This is a 24 hour open market where we can do trade for 5 days in a week (Monday to Friday) Along with it buying and selling of currencies can be done according to our determination and time means to say that there are no fixed rules to buy and sell its your own choice that when you have to enter and when you have to exit from the foreign exchange market.

  • Different Participants of Foreign Exchange Market:
  • Big Players Market: Its important for us to understand that who move the prices of currencies in the market because this will help people to invest, trade, and act like a professional investor and trader in forex trading market or foreign exchange market. Those are the big players who have a great potential to move the market prices up and down in a big way. Overall the market is totally controlled by big players hence central govt can participate later if changes need. The interbank exchange market or interbank market is one of the top level of market of foreign exchange where big players banks buy and sell currencies.Along with it securities dealers, hedge fund players, big institutional investors can be also a part of it. 

Lets take a look on some top currency trader’s in the world they are as follows:

  1. UBS
  2. Citi Bank
  3. JP Morgan
  4. Barclays
  5. HSBC
  6. Deutsche Bank
  7. BAML
  8. Goldman Sachs 
  9. Morgan Stanley 
  • Small Players Market:

Retail forex traders are called as small players in the market and we also called retail traders small fishes because all the big players move the market and we are the people who are retailors here because no control on market we have to just go with the big players market flow. That’s why a lot of retail trader’s are not able to earn consistent amount of money from this market. Only a small percentage of people are able to earn money in forex market. Which indicate that this market is so much risky for people if they don’t have enough sense that how big players make the market patterns and how to follow their indications during trading. Even losses can come in so many ways but still its a deep concept to learn, experience required. 

Forex trading is a good way to become financial free in life but first of all its prominent to undrestand buyers and sellers psychology here, because big players mostly do opposite of small players. Big players never lose money in any kind of financial market, they are just here to make money so small players have to take the risk and they have to earn and lose money here. Understanding the big players foot prints would be really crucial to understand the overall

 structure of the market trend and patterns. 

Along with there are so many other participants too who get involved in this market they are as follows:

  1. Central Govt 
  2. Investment Management Firms 
  3. Commercial Companies 

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