For anyone who wishes to invest in the Foreign Exchange market knowing everything there is to know about FX rates is crucial. Without knowing everything about them, making a well-informed decisions about trading on the market becomes a lot harder.
In this article we take a look at the various different FX rates you should know about and which need to be considered when trading on the Forex market.
Type 1 – Exchange Rate
Of all the various FX rates you will need to know about the exchange rate that relates to a particular pair of currencies, is the easiest to compute. All this is the rate that will actually help you establish what the latest price is in relation to two currencies on this market.
It is this rate that actually determines what price you pay in relation to the first currency in order to then get the second one. For example if the AUD/USD is trading at 1.0992, what this then implies is that the 1 AUD is priced at 1.0992 USD.
Type 2 – PIP Value
When it comes to FX rates, PIP stands for “Percentage In Point”. This is the smallest possible move that any type of currency is able to make. You need to be aware that the value of the PIP can differ from one market to the next. For example the AUD/USD currency pair an increment of 0.9069 to 0.9070 is just one PIP. So in actual terms this PIP is really work 0.0001.
Type 3 – Spread
Unlike other FX rates when it comes to this one it tells you the difference between the bid price and the offer price. For example if the bid price for say the EUR/AUD IS 1.3639 then the offer price is 1.3647 then the spread rate would be 1.3647 to 1.3639 or in more simple terms 0.0008.
A great many brokers involved in the Forex market earn their living from spreads in currency pairs, rather than charging their clientele a commission.
Type 4 – Rollover Rate
When a transaction is being carried these FX rates show the difference between the interest rates of two currencies. Such differences will then either be credited or debited to the traders account when it has been held overnight. For example if the GBP interest rate is 1% and the interest rate on the AUD is 0.25% then the difference between these two rates would be 0.75%.
If you choose to hold the long position in relation to the GBP/AUD then you will earn interest on your account i.e. it would rollover. However if you decide to hold a short position then you will be required to pay interest in order to reflect this difference.
Type 5 – Leverage And Margin
Of all the types of FX rates you need to learn about hit is one of the most important. Through the use of leverage you are able to place your account in a much better position than the actual margins on it. So it means you could earn more profit from transactions carried out.