What is a Fixed Exchange Rate?

Understanding Fixed Exchange Rates

A fixed exchange rate system pegs a nation's currency to another currency, a basket of currencies, or a commodity like gold. Central banks defend the peg by intervening in currency markets, adjusting interest rates, and maintaining reserve buffers. Traders follow peg regimes closely because abrupt devaluations create seismic moves.

How Pegs Are Maintained

Authorities buy or sell their currency to keep the rate within a set band. They may also impose capital controls or adjust fiscal policy to support the peg. Countries with large foreign reserves and stable macro fundamentals can defend pegs longer; fragile economies eventually face speculative attacks.

Trading Implications

Pegged pairs usually display tight ranges and limited volatility until confidence cracks. Carry trades can thrive thanks to predictable moves, but any sign of reserve depletion, current account stress, or risk aversion can trigger violent breakouts. Always monitor central bank commentary and macro indicators for cracks in the regime.

Advanced Guidance

Build a repeatable, rules‑based process so decisions are consistent across sessions and instruments. Start from context (higher‑timeframe structure, positioning, macro tone), then define precise triggers and invalidation on execution charts. Track spread and depth so your order type matches conditions. Pre‑compute scenarios (breakout, fakeout, mean‑revert) and map actions for each to reduce hesitation.

Execution Framework

• Plan entries at levels with confluence (structure, momentum, time‑of‑day).
• Place stops beyond the logical invalidation, not arbitrary distances.
• Target at least 2–3R; scale out methodically and trail remainder.
• Avoid thin liquidity windows unless the setup explicitly requires it.
• Record slippage and spreads; poor fills can erase edge.

Review Loop

• Journal setups by session and pair to learn where they excel.
• Tag trades by catalyst (news, trend continuation, range breakout).
• Recalculate expectancy monthly; prune underperforming variants.

Risk Controls

Keep daily loss limits, reduce size after consecutive losses, and pause during regime shifts. Survival enables compounding; treat discipline and execution quality as part of your edge.