Base Currency: Definition, Example, Vs Quote Currency

For instance, the EUR/USD currency pair has the euro as its base currency and the US dollar as its quote currency. Forex trading involves the constant purchase and sale of currency. When buying a currency pair, investors purchase the base currency and sell the quoted currency. The bid price represents the amount of quote currency needed to receive one unit of the base currency. More commonly traded currency pairs, such as the major pairs discussed above, have lower spreads because they occur more often, which allows the exchange to make money on the volume. An example of an exotic currency pair is the USD/SGD (U.S. dollar/Singapore dollar).

• The currency abbreviations being used for currency pairs are given by the International Organization for Standardization (ISO).
• The price displayed on a chart will always be the quote currency – it represents the amount of the quote currency you will need to spend in order to purchase one unit of the base currency.
• Based on this information, a trader can correctly build a trading strategy.
• There are several “major” currency pairs that are traded most often; foremost among those is USD/EUR.
• If an investor thinks the base currency is going up, they purchase it, and currency pairs are sold if the base currency seems to depreciate.
• As a result, spreads on trading forex major pairs are lower than on cross or exotic pairs, making them the best trading currency pairs.

Most e-commerce businesses aim to take advantage of these opportunities, and for that, their business model must have the capacity to conduct business internationally. Each currency pair consists of the base currency, which is the first in the pair, and the counter or quote currency, which comes after the base currency. These categories usually reflect the liquidity and volatility of the currency pairs. Trading is done on regulated exchanges called Forex (short for “foreign exchange”) and off-exchange markets. Businesses need a base currency to determine their profit and loss.

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Many retail trading firms also offer 10,000-unit (mini lot) trading accounts and a few even 1,000-unit (micro lot). In this example, the base currency is the euro and the quote currency is the US dollar. If the price of the EUR/USD pair is 1.3000, it means that you would need $1.30 to buy a single euro.

The second specified currency in a currency pair is sold and called quote currency. In the above case, someone buying 1 euro will have to pay US$1.33; conversely one selling 1 euro will receive US$1.33 (assuming no FX spread). A pair is depicted only one way and never reversed for the purpose of a trade, but a buy or sell function is used at initiation of a trade.

When indicating a currency pair, the two abbreviations are written with a slash in between, but the slash can be removed entirely or replaced by a period or dash. The first currency mentioned in a currency pair is the base currency. When currency pairs are traded, the base currency is bought, and the quote currency is sold.

When a trader buys a currency pair, they are buying the base currency and selling the quote currency. For example, if a trader buys the USD/EUR currency pair, they are buying US dollars and selling euros. Currency pairs are used in foreign exchange (forex) trading, where traders buy and sell currencies in order to profit from changes in exchange rates.

How a Base Currency Works

In the so-called direct quote, the base currency is the US dollar. The quote for such a pair indicates how much ¥ you need to buy $1. According to this traditional hierarchy on the Forex market, there are pairs EUR/USD and CHF/JPY pairs, but there are no USD/EUR or JPY/CHF. In the case of the EUR/USD currency pair, EUR is the base currency because it is higher in the hierarchy than the USD. Currencies are traded in fixed contract sizes, specifically called lot sizes, or multiples thereof.

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Cryptocurrency on Forex market

Therefore, currency pairs are needed for forex trading and indicate companies’ mechanisms and profit/loss margin. The base currency is the first currency in a forex pair quotation referred to as the transaction currency. The second of the pair is the quote currency or the counter currency.

• A base currency is the first currency that appears in a forex pair quotation.
• A base currency calculates how much quote currency would be required to match one single unit of the base currency.
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• They constitute the largest share of the foreign exchange market, about 85%,[5] and therefore they exhibit high market liquidity.
• Every novice trader usually wonders which pairs are best suited for trading?

For example, traders who prefer intraday transactions are recommended to open positions in highly liquid currency pairs – majors. Majors have the smallest spread, which is important for short-term positions, and high liquidity provides the best quotes and quick execution even with large volumes. The constantly moving exchange market needs to have an anchor in forex trading. The investors base their purchases and sales on the base currency value. If an investor thinks the base currency is going up, they purchase it, and currency pairs are sold if the base currency seems to depreciate. In ‘Exotic’ or ‘minor’ currency pairs a major currency is paired with a currency from a developing market.

Currency Pairs in Forex Trading

In order to find out the relative value of one currency, you need another currency to compare. When you buy one currency, you automatically sell another currency. You should consider whether you understand how ᏟᖴᎠs work and whether you can afford to take the high risk of losing your money.

It provides the direction and the estimation upon which trading is taking place. There is no US dollar in these pairs, but the quotes are calculated based on the exchange rate of each currency against the dollar. In this article, we will learn what a currency pair is, how it base and quote currency is designated, which currency is known as base and which is quote. We will also consider the hierarchy of currencies on the modern market and see what groups currency pairs are divided into. We will also look at the concept of “quotation” and check different quotation types.

Conversely, when you sell the currency pair, you sell the base currency and receive the quote currency. A currency pair is the quotation of two different currencies, with the value of one currency being quoted against the other. The first listed currency of a currency pair is called the base currency, and the second currency is called the quote currency. The analysis in this material is provided for information only and is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers.

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In order to trade successfully on the foreign exchange market, you need to understand how prices are formed and calculated on Forex. The currency pairs that do not involve USD[9] are called cross currency pairs, such as GBP/JPY. Pairs that involve the euro are often called euro crosses, such as EUR/GBP. Quotes against major currencies other than USD are referred to as currency crosses, or simply crosses.

Understanding the base currency is crucial for any forex trader, as it determines the value of the quote currency and affects the overall profitability of a trade. Trading currency pairs are often conducted in the foreign exchange market. The forex market enables buying and selling, and conversion of currencies for international trade and investing. Generally speaking, the forex market is open 5 days per week, 24 hours a day. A currency pair is the quotation of the relative value of a currency unit against the unit of another currency in the foreign exchange market.

Such a strategy can result in high profits even with small volumes of open positions. A base currency is the first currency that appears in a forex pair quotation. In the foreign exchange market, one currency will always be quoted in relation to another because you are buying one while selling the other. Traders should analyze the behavior of major currency pairs and other types of currencies (cross, exotic). It will help them understand which currency will be the strongest and which will be the weakest in a certain period. Based on this information, a trader can correctly build a trading strategy.