The base currency, which is also known as the transaction currency, is the first currency appearing in a currency pair quotation. The direct quote in the United States for this pair might look like 1.2, indicating that 1 Euro can be exchanged for 1.2 U.S. Here, the base currency (Euro) serves as the standard against which the quote currency (U.S. Dollar) is measured. Similarly, the quote currency helps you understand how much of it is needed to acquire a unit of the base currency, thereby guiding your trading decisions. When trading, your goal might be to buy the base currency if you anticipate its value will rise or sell it if you expect it will decline, relative to the quote currency.
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The concept of a base currency is best understood through a practical example. Let’s consider the currency pair EUR/USD, which includes the Euro (EUR) and the United States Dollar (USD). Without understanding which currency serves as the base in an exchange rate, you may end up making less informed decisions that could cost you financially.
A base currency is the first currency listed in a foreign exchange quote. For example, if a quote is stated as GBP/USD, the quote states the number of U.S. dollars that will be required to purchase one British pound. The second https://www.day-trading.info/penny-stocks-to-watch-for-march-2021-2021/ currency stated in the quote is called the quote currency. In this currency pairing, the value of the base currency is expressed as 1 unit, while the quote currency’s value can fluctuate relative to the base currency.
We recommend that you seek independent advice and ensure you fully understand the risks involved before trading. In the forex market, currency unit prices are quoted as currency pairs. The U.S. dollar is the base currency for most of the major currency pairs, including USD/JPY (Japanese yen as the quote currency), USD/CHF (Swiss franc), and USD/CAD (Canadian dollar). As noted above, traders use 12 best freelance websites for developers the base currency to determine how much of the quote currency is needed for them to purchase one unit of the base currency. For example, if you were looking at the CAD/USD currency pair, the Canadian dollar is the base currency and the U.S. dollar is the quote currency. The base currency will appear first, and will be followed by the second currency, known as the quote or counter currency.
Over 1.8 million professionals use CFI to learn accounting, financial analysis, modeling and more. Start with a free account to explore 20+ always-free courses and hundreds of finance templates and cheat sheets. If he expects the price to rise, he buys USD and can sell them again at a later date when the price has risen, thus making a profit. For privacy and data protection related complaints please contact us at Please read our PRIVACY POLICY STATEMENT for more information on handling of personal data. Before your trip, you check the exchange rate and see that EUR/USD is at 1.2. IG International Limited is part of the IG Group and its ultimate parent company is IG Group Holdings Plc.
- Forex quotations are stated as pairs because investors simultaneously buy and sell currencies.
- We advise you to carefully consider whether trading is appropriate for you based on your personal circumstances.
- In this currency pairing, the value of the base currency is expressed as 1 unit, while the quote currency’s value can fluctuate relative to the base currency.
- By monitoring these currency pairs, the company can manage its investments more cost-effectively, for example by using hedging options to freeze a certain exchange rate.
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Currency Pair
Base currency and quote currency are two common expressions in the Forex (foreign exchange) market. According to foreign exchange standards, if a trader wants to purchase €1, they must pay $1.55. The currency pair quotation is read in the same manner when selling the base currency, so if a seller wants to sell €1, they will get $1.55 for it. Trading foreign exchange on margin carries a high level of risk, and may not be suitable for all investors.
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. Here, XXX is the base currency and YYY is the quote currency. Understanding the difference between these two terms is crucial for anyone engaged in forex trading, international business, or global travel. When you trade currencies, you go long the base currency and short the other.
How to Read Base Currencies
On the other hand, when the currency pair is sold, the investor sells the base currency and receives the quote currency. Thus, the selling price of the currency pair is the amount one will receive in the quote currency for providing one unit of the base currency. By monitoring these currency pairs, the company can manage its investments more cost-effectively, for example by using hedging options to freeze a certain exchange rate. If the exchange rate changes to the company’s disadvantage, the frozen exchange rate still applies thanks to the hedging contract, so the company does not incur a loss. If you’re interested in putting your understanding of base currency to the test, consider trading on markets.com, a leading Forex CFD trading platform. It offers a range of tools, charts, and resources to help both novice and experienced traders make informed decisions.
What is forex?
The exchange rate between two currencies directly correlates with the concept of base and quote currencies. If the exchange rate for EUR/USD is listed as 2.15, this means that 1 Euro can be exchanged for 2.15 US Dollars. In a currency pair, such as EUR/USD, EUR (Euro) is the base currency and USD (United States Dollar) is the quote currency. This arrangement communicates the value of one currency relative to another. Investors generally buy the pair if they think that the base currency will gain value in contrast with the quote currency.
Factors that Impact Currency Pairs
That is, of course, if you don’t already have a preferred currency in mind. 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.