How does a base currency work in Forex and which one to choose?

what is base currency

The buyer pays the ask price and the seller gets the bid price. The market maker earns the spread, or difference between the two prices. 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 base currency, which is also known as the transaction currency, is the first currency appearing in a currency pair quotation. It is the keystone for interpreting exchange rates, analysing market movements, and making informed trades. As you delve deeper into the world of foreign exchange, this knowledge will serve as an invaluable tool for navigating complex currency dynamics.

You could sustain a loss of some or all of your initial investment and should not invest money that you cannot afford to lose. The base currency and quote currency are fundamental concepts in forex trading that describe the two currencies being exchanged in a currency pair. The base currency, the first in the pair, serves as a reference or standard and is the currency being bought or sold. The base currency is the first currency listed in a currency pair, such as USD/EUR (where the U.S. dollar is the base currency). The second currency is called the quote or counter currency. If you are “long” the currency pair, you expect the base currency to rise in terms of the quote/counter currency.

what is base currency

We introduce people to the world of trading currencies, both fiat and crypto, through our non-drowsy educational content and tools. We’re also https://www.topforexnews.org/ a community of traders that support each other on our daily trading journey. Here, XXX is the base currency and YYY is the quote currency.

IG International Limited is licensed to conduct investment business and digital asset business by the Bermuda Monetary Authority. 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. 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.

Create an account!

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. Leveraged trading in foreign currency or off-exchange products on margin carries significant risk and may not be suitable for all investors.

  1. The U.S. dollar is frequently used as the base currency, since it is the dominant currency in the world economy, and so is most frequently used to pay for transactions.
  2. The base currency and quote currency are fundamental concepts in forex trading that describe the two currencies being exchanged in a currency pair.
  3. The company is incorporated according to the laws of Dubai and the United Arab Emirates.
  4. The risks of loss from investing in CFDs can be substantial and the value of your investments may fluctuate.
  5. Local shifts in interest rates, trade deficits, and economic growth can all be reasons to favor one currency over another.

The risks of loss from investing in CFDs can be substantial and the value of your investments may fluctuate. 70% of retail client accounts lose money when trading CFDs, with this investment provider. CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. You should consider whether you understand how this product works, and whether you can afford to take the high risk of losing your money. We want to clarify that IG International does not have an official Line account at this time.

Definition and Examples of Base Currency

The base currency will appear first, and will be followed by the second currency, known as the quote or counter currency. 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. 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.

what is base currency

Base currencies represent how much of a quote currency you need to buy a single unit of the base currency. So when the base currency is stronger or more expensive, it takes a smaller amount of the quote currency to buy a single unit of the base currency. Nonetheless, when trading currencies, investors are selling one currency in order to buy another. It now wants to invest in its expansion there and purchase a warehouse. The warehouse currently costs $100,000, so the company looks at the USD/GBP currency pair to see how many British pounds sterling it needs to allocate to this investment. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result.

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. Forex quotations are stated as pairs because investors https://www.dowjonesanalysis.com/ simultaneously buy and sell currencies. For example, when a buyer purchases EUR/USD, it means that he is buying euros and selling U.S. dollars at the same time. When the base currency (EUR) is high, it takes more to buy a single unit of the quote currency (USD).

What is a base currency?

This may seem like a large minimum investment (and it is), but currency trading can have margin factors as low as 2% depending on the currency pair. That means if you trade one lot with dollars as the base currency, you only need $2,000 in the account to control $100,000 in the trade. A non base currency or a quote currency is the second component in a currency https://www.forexbox.info/ pair. For instance in these pairs USD is a non base currency – EUR/USD, GBP/USD, AUD/USD and NZD/USD. There are currency pairs where USD becomes base currency, such as USD/JPY, USD/CAD and others. 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.

Understanding the concept of a base currency is a foundational element that can significantly impact your financial decisions, whether you’re trading forex, conducting international business, or travelling abroad. 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.

Forex trading costs

It offers a range of tools, charts, and resources to help both novice and experienced traders make informed decisions. 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. The exchange rate indicates how much of the quote currency is needed to purchase 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.

Understanding what a base currency is can offer insights into how exchange rates are determined, how to interpret forex quotes, and how to make smarter financial decisions when dealing with foreign currencies. Companies that are internationally active and also do business in foreign currencies are also interested in currency pairs. For a British company that does business in the USA in US dollars, the USD/GBP or GBP/USD currency pair is interesting.

Leave a Comment

Your email address will not be published. Required fields are marked *