In the world of Forex trading, there are multiple aspects that one has to learn. As a beginner, all the terms that are frequent in Forex trading can be confusing, hence the need to learn them. One of these terms is the base and quote currency. So, what is a base and quote currency? This article gives a clear description of these terms.
What is Currency Pairs?
Before you proceed into knowing what a base and quote currency is, it is essential to learn on currency pairing. A currency pair is a structure that helps in deciding the quotations and prices of the currencies that are traded in the Forex market. The value of the currency pair is a variable rate that is determined by a comparison of two currencies.
In the Forex market, a total of 180 currencies are legally accepted throughout the world. Therefore, it is theoretically sound to say that a single currency can be exchanged with 179 different currencies.
This brings the question, how would we know which currency will be exchanged against other currencies? In such confusion, it is essential to mention that the two currencies involved in an exchange appear in pairs. There is one which is bought, and there is one which is sold to buy the first one. Ideally, this is what is referred to as the base and quote currency.
What is Base Currency?
Now that you know about the currency pair, you can proceed into learning about base currency. The currency appears first in every pair and is also referred to as the transaction currency. In accounting, firms tend to use base currency as the accounting or domestic exchange to signify all the losses and profits.
For instance, when trading the USD/ CAD pair, the United States Dollar (USD) represents the base currency. Please note, the currencies are written in abbreviations to describe the currencies of particular countries. For instance, the main currency codes include the USD to represent the US dollar, CHF for the Swiss, EUR represents Euro, JPY represents the Yen, AUD represents the Australian dollar, and the GBP represents the British Pound.
During the exchange, the currency pairs represent the amount of the quote currency that you need to buy a single unit of base currency provided. For instance, if EUR/USD = 2.55, this means $2.55 is the value of 1 EUR. In layman terms, it means that to buy 1 EUR, you have to pay $2.55. You’ll read the pair quotation in the same way when it comes to selling any base currency.
The forex quotations mean that an investor is simultaneously buying and selling currencies. Therefore, in a EUR/USD exchange, it means that the trader is buying Euros and selling US Dollars simultaneously. Investors usually buy pairs when they prospect a gain in the base currency and sell when base currency seems to lose value compared to the quote currency.
What is Quote Currency?
It is also referred to as the counter currency, and it appears second in any currency pair. It is used to determine the value of the base currency. It is also referred to as the second currency in some cases.
In every currency pair exchange, the quote currency must be exchanged through a sale to buy or dispose of a unit of the base currency. Therefore, when the currency pair rate increases, the value of the quote currency, whether in a direct or indirect pair, falls.
In an example that involves the USD/CAD currency pair, the CAD represents the quote currency. In this case, it is used to know the worth of a single USD, which in this case, the Canadian dollar is a foreign currency.
There is a lot to learn when it comes to Forex trading. However, with the basic understanding of base and quote currencies, it is easier to trade since you understand what you are buying and selling in a foreign exchange transaction.
Therefore, you can easily influence your trading since these two currencies have a lot to do in the currency market. The fact that you have learned about these currencies does not mean that it is enough to trade. There is still a lot that you should consider to be successful in your trading.