Forex pairs consist of two currencies: one is called Base and the other is called a quote currency. Understanding and selecting both currencies carefully is essential for successful trading.
Base Currency definition
In a currency pair, the first component is called a base currency and the second one is called its quote currency. For example, in EUR/USD EUR is a base currency and USD is a quote currency.
Why is understanding the Base Currency important for traders?
- Understanding every detail of how the markets work can increase your profits.
- Learning the trading terminology will help you understand market news faster.
- Understanding the terminology will make communication easier with the trading community.
Thorough Base Currency Explanation
Forex trading is different from investing in physical assets. Mainly because the Forex pairs consist of two components: base and quote currencies and the one is valued in relation to the other. As a result, traders can speculate in both directions. For example, you can go long or short with EUR/USD. Whereas you can only buy physical gold, stock or a currency and hope that its price will increase in the future.
When deciding which currencies to trade and which one to choose as base and quote currencies, you should take into account a number of factors. Major currencies like EUR, USD, GBP, CHF, and JPY are among the most traded ones and therefore offer high liquidity and tight spreads. It’s best to trade major and minor pairs to save fees on spreads.
Example of Base Currency in Forex
In Forex one currency can be a base currency in one pair and a quote currency in another. For example, in a EUR/USD pair USD is a quote currency and in USD/CAD it’s a base currency. Usually, currencies with a greater value per unit are selected and traded as base currencies. For example, GBP/USD=1.18 means that in order to get every 1 British pound you need to spend 1.18 US Dollars.
FAQs on Base Currency in Trading
What is a non base currency?
A non base currency or a quote currency is the second component in a currency pair. For instance in these pairs USD is a non base currency – EUR/USD, GBP/USD, AUD/USD and NZD/USD. EUR, GBP, AUD and NZD are base currencies. There are currency pairs where USD becomes base currency, such as USD/JPY, USD/CAD and others.
How is base currency calculated?
Base currency is always calculated in relation to its quoted currency. For instance: when we say that British Pound vs Japanese Yen or GBP/JPY = 162.222, we mean that in order to buy one British Pound you need to pay 162.222 Japanese Yen.