As an intermediate foreign exchange trader, you may presume that just like fixed exchange rates, you can use floating exchange rates to your advantage. Since the two types of floating exchange rate systems, clean float and dirty float, are affiliated to various indicators, the strategy is to determine the most profitable time to buy, lock in, or sell your currencies. Therefore, by knowing more about these particular types of floating exchange rates, you can solidify your lead over the average novice trader.
Clean Float 101
Clean float, also called pure currency exchange rate, is a floating exchange rate system wherein a currency’s value relies heavily on a country’s law of supply and demand. In spite of a government’s non-interference, rates are determined, and often it is done by acknowledging any market force that can weaken or strengthen an economy. It is coined with the term “clean” due to its disassociation with different outside entities such as countries’ central banks and other financial institutions. Typically, it is a result of capitalism and free market economics.
Dirty Float 101
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Dirty float, also called managed float regime, is a floating exchange rate system wherein a currency’s value does not depend on market forces. Rather than base them on economic conditions and other uncontrollable factors (e.g. the law of supply and demand), currency rates are influenced by central banks and other financial institutions, as well as the government. It is described as a “dirty” float since it follows the often times confusing figures of exchange rates as they fluctuate daily. As of the year 2014, it has been reported that over 40% of countries around the world, including the United States of America, Thailand and Peru, rely on the system.
Which Is Better?
Clean float can benefit you as a trader if you are in a capitalistic economy, yet you may find that the system can also be a bit shaky and unpredictable. On the other hand, dirty float can be ideal if you prefer an organized system, yet it can also be quite complex – especially if various financial institutions insist on setting different currency regulations. Both floating exchange rate systems come with their own string of advantages. That said, as an intermediate forex trader, it is up to you to determine which can be more instrumental for a preferred setting.
This article was written by Zahir from MTrading