It’s the currency you’re buying or selling when you open a position. The quote currency, the second in the pair, is used to value the base currency. For example, in the EUR/USD pair, EUR is the base currency and USD is the quote currency.
When Is Currency Trading Conducted?
In simpler terms, when dealing with EUR/USD at a rate of 1.1, it means you can acquire 1 Euro by paying 1.1 US Dollars. The base currency becomes a standard or reference point for evaluating the value of other currencies. Currencies are commonly bought and sold on the spot market based on their trading price. The price is determined by supply and demand and calculated based on interest rates, economic performance, geopolitical environment, and price speculation. Another way in which base and quote currencies are used is with companies doing business internationally.
Markets
An exchange rate attached to a currency pair indicates how much of the quote currency is needed to buy a single unit of the aforementioned base currency. However, there are some exceptions to this rule – for example, with EUR/GBP the EUR is actually the base currency and GBP is the quote currency. Base currencies are also sometimes referred to as transaction currencies, while quote currencies are known as counter currencies. Ultimately, though, which one is which doesn’t really matter – all that matters is that you’re using a strong base currency to buy or sell a weaker one. Benzinga will now offer some examples to help you better understand the role of the quote currency in forex trading.
Understanding Currency Pairs
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 base currency and quote currency 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. Understanding the dynamics between these two currencies is essential for trading them successfully. When a trader buys a currency pair, they buy the base currency and simultaneously sell the equivalent amount of the quote currency.
If you’ve tried forex trading before, you’ve heard the terms base currency and quote currency. Jay and Julie Hawk are the married co-founders of TheFXperts, a provider of financial writing services particularly renowned for its coverage of forex-related topics. While their prolific writing career includes seven books and contributions to numerous financial websites and newswires, much of their recent work was published at Benzinga.
We introduce people to the world of trading currencies, both fiat and crypto, through our non-drowsy educational content and tools. We’re also a community of traders that support each other on our daily trading journey. In both examples, the base currency (Euro) serves as the focal point for the transaction, dictating how much of the quote currency (U.S. Dollar) is needed for the exchange. Various geopolitical events and a state’s economic stability can create volatility in the forex market. Diplomatic events, conflicts, presidential elections, and trade agreements can lead to sudden and sharp currency fluctuations.
Understanding currency pairs
- Besides his extensive derivative trading expertise, Adam is an expert in economics and behavioral finance.
- All major currency pairs are listed with the US dollar because the US dollar is seen as the world’s primary reserve currency.
- Here, the USD is the domestic currency and determines the value of one EUR.
- The second currency in the currency pair (the one on the right side from the slash “/”) is called counter currency or Quote Currency.
- They would sell the pair if the base currency is expected to weaken.
In most cases, the base currency is the stronger currency in the pair, while the quote currency is the weaker one. However, this isn’t always the case and it’s important to pay attention to economic indicators when choosing which currency to trade. In the foreign exchange (forex) market, currency unit prices are quoted as currency pairs.
The abbreviations used for currencies are prescribed by the International Organization for Standardization (ISO). Currency pairs use these codes made of three letters to represent a particular currency. She holds a Bachelor of Science in Finance degree from Bridgewater State University and helps develop content strategies. IG International Limited is part of the IG Group and its ultimate parent company is IG Group Holdings Plc.