An exchange rate is the price at which one country’s currency trades for another on the foreign exchange market. There are 2 extreme regimes of exchange rates – flexible exchange rate and fixed foreign exchange rate. It is important that you know such when you are in to online forex trading.

What is exchange rate? What are the various types of foreign exchange rate available? These are all the queries that hit the mind of an investor in currency trading who wants to make some money in the foreign exchange market trading the currency pairs that have great prospects of yielding profits. Mainly the two kinds of exchange rates that are available in the day-to-day market activity are Fixed and flexible exchange rates.

Flexible Exchange Rate

The flexible exchange rate in currency trading is a price that is determined by the trend and the behavioral pattern of the market in the days to come. In this exchange rate system the market parameters like demand and supply have a control on the market price without the intervention of government policies and regulations.

The flexible exchange rate system is broadly categorized into independent and managed flexible system. The most important variables like demand and supply determines the former exchange rate while the latter has some relevance to the independent flexible system but is typified as an independent type of flexible system. The real essence in the managed flexible system is that the financial authorities arbitrate sometimes so as to manage the rates in order to put the high volatile nature off.

Fixed Exchange Rate

The government doesn’t allow the currency of that particular country to vary and hence they will fix the exchange rate of that currency to a predetermined and preset value. In order to maintain the rate as such the government will be ready to adopt any measures and in this process will ensure that there is no variation in the rate of that currency. The fixed exchange rate and the pegged exchange rates are the two commonly known rates, which are applied to the currencies in order to let it get traded at an unvarying price.

In case of a fixed exchange rate system whenever there is a decrease in the exchange rate it is known as revaluations. This decrease in the exchange rate is uncommon and is basically sporadic in nature. On the other hand the whenever there is an increment in the value of the exchange rate it is known as the devaluations. Whenever devaluations happen in the exchange rate price it will make the current account balance to go up and in this process it makes the country’s export become less expensive for the outsiders and also dampen import by making import products pricier for household users. Thus there will be an increase in trade surplus and at the same time decrease in a trade deficit. If one considers the case of the revaluation, things happen in the contradictory way.

These are just the basic information in forex investment that can be furnished on the two kinds of exchange rate system that affect the volatile foreign exchange market which in turn affects the trading activity of the inherent traders.