Starting Forex Trading: Exchange Rate Mechanism

• Variable Exchange Rate Mechanism: In a variable exchange rate mechanism, currency fluctuates freely, and the value of the currency depends on market capabilities.

• Fixed Exchange Rate Mechanism: In a fixed exchange rate mechanism, currency cannot fluctuate freely, and the value of the currency has a fixed level for some single currency, such as USD, or a fixed level for basket currency. Under the fixed exchange rate mechanism, local central banks intervene and prevent exchange rate fluctuations through foreign exchange reserves.

The main factor influencing the exchange rate in forex trading

The market value of free-floating currencies is determined by many factors such as international trade, economic and political environment, interest rates, and short-term currency supply and demand. Whats different from other asset markets is that the forex market is a complete market where exchange rates can fluctuate freely.

Over-the-counter transaction (OTC)

The forex market is an over-the-counter trading market, which means that there is no actual trading place and no prescribed transaction and payment time when both parties make a transaction in this market. The forex market runs through an electronic transaction network between banks, companies, and individuals, and is constantly operated 24 hours a day.

After constant price negotiations between forex broker, the final purchase/sale price is entered into the computer program and displayed on the official offer screen. The forex offer between banks is called the exchange rate between banks.