By admin on December 8, 2022

Quote Currency Definition Forexpedia by Babypips com

Exchange platforms allow market participants to swap a particular currency in their possession for a different one. However, if an exporter from China wants to trade with Uruguay, they estimate the total value of the exports to be Chinese Yuan (CNY) 4000. Therefore, at the time of payment, he will evaluate the Uruguayan Peso (UYU) value with CNY by considering the latter as the base currency. 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. If they believe the value will decrease, the opposite is true, where they could sell the euro and buy it back at a later stage at a lower price with the hopes of making a profit.

Difference between base currency and quote currency

And that’s why we’ve prepared this piece to show you everything you need to know about reading currency pairs in Forex. Another interesting feature are some of the rules used by some financial institutions in their home market. In the case of the EURGBP pair, some UK institutions use the GBPEUR quote, the British pound being their natural base currency. Understanding how base and quote currencies work is fundamental to becoming a successful Forex trader.

All major currency pairs are listed with the US dollar because the US dollar is seen as the world’s primary reserve currency. The US dollar can be either the base currency or the quote currency; for example, in USD/JPY, it’s the base currency. When looking at a forex chart, the price listed for any forex currency pair will always be the quoted currency price. The quote currency is essential for traders as it determines the price at which they can buy or sell a specific currency pair. The base currency is the first currency listed in a forex currency pair and acts as the reference point for all transactions within the forex market. This is because, in the forex market, one currency is always quoted in relation to another; when you buy one currency, you’re simultaneously selling another.

  • While the concept is essential in the Forex market, its influence extends beyond trading.
  • When you trade currencies, you go long the base currency and short the other.
  • It is possible to find how many units of counter currency can be exchanged for a unit of the base currency.
  • The base currency and quote currency are fundamental concepts in forex trading that describe the two currencies being exchanged in a currency pair.

It acts as the reference point within the currency pair to indicate how much money of the quoted currency is needed to buy 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. 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). All major currency pairs include USD either as the base currency or the quote currency. The reason for this is that the US Dollar is a widely used currency for transactions all around the world.

Base currency and quote currency explained: What's the difference?

Local shifts in interest rates, trade deficits, and economic growth can all be reasons to favor one currency over another. This is similar to the AUDUSD and NZDUSD pairs, for example, as both the Australian and New Zealand dollar have historically had a close link to the British pound. Here, the US dollar is the stronger currency, yet it is listed as the second most valuable currency (however, in the early days of forex in the 1970s, both AUD and NZD were more valuable than the dollar).

On the other hand, if they predict the value of GBP will decrease against the US dollar, they could open a short (sell) position and buy it back later at a lower price, thus potentially making a profit. We recommend that you seek independent financial advice and ensure you fully understand the risks involved before trading. The quote is in five decimal places here, but some brokers use four decimal places. But all the pairs containing JPY, for instance, have two or three decimal places, depending on the broker. 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.

Whereas if they sell the base currency, they are simultaneously buying the quote currency. In the world of forex trading, many factors could affect the price movement of base and quoted currencies. Below, you’ll find some factors that could influence the price movements of base and quote currencies. Base currency (also called transaction currency) is always given first in a currency pair; quote currency (also called counter currency) is given second.

Investing in Over the Counter (OTC) foreign exchange and derivative products carries a high level of risk and is not suitable for all investors. We encourage you to consider your investment objectives, your risk tolerance, and trading experience and seek independent financial or tax advisor advice or conducting thorough research before trading. You could lose substantially more than your initial investment so do not invest money you cannot afford to lose. We only provide general advice which does not consider your financial objectives or personal circumstances. The content of this website should not be interpreted as personal advice. An interesting case is the EURGBP pair, which actually makes the euro the only currency that appears as the base currency in all currency pairs, i.e. in first place.

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. It is possible to treat a currency pair as a single entity and apply buying and selling operations to it as a whole. For example, if a trader purchases the BTC/USD currency pair, they receive the base currency, BTC, in exchange for the quote currency, USD. Conversely, when a market participant decides to sell the BTC/USD currency pair, they obtain USD in return for a specified amount of Bitcoin.

There is no such thing as a ‘good’ or ‘bad’ currency pair if you know your way around trading. Newcomer traders are, however, advised to initially stick to major currency pairs as their assets currently have more analytics data available. Currency pairs provide an insight into the amount of quote currency needed to purchase one unit of the base currency.

  • We only provide general advice which does not consider your financial objectives or personal circumstances.
  • If you open a short (sell) position in a forex currency pair, you will sell the base currency.
  • If you’ve ever tried to demo trade, you’ll find out that your trades are always starting out on the negative.

Understanding currency pairs

For example, in EUR/USD, the Euro is the base currency, and you can buy 1 EUR by paying USD 1.1. For accounting purposes, a firm may use the base currency as the domestic currency or accounting currency to represent all profits and losses. The Fortune Prime Group of companies is authorized and regulated in various jurisdictions. By using this website, you acknowledge that you have read, understood, and agreed to the terms of this disclaimer. If you have any questions or concerns, please contact us for further clarification.Please note that this disclaimer applies specifically to non-Australian products.

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This is because currencies are valued in pairs, and a currency’s exchange rate reflects its relative strengths or weaknesses against another. Investors generally buy the pair if they think that the base currency will gain value in contrast with the quote currency. On the other hand, they may decide to sell the pair base currency and quote currency if they think that the base currency will lose value in contrast with the quote currency. If they believe the euro's value will increase, they could open a long (buy) position by buying the euro and selling it at a later stage at a higher price with the hopes of making a profit.

Trading Strategies Involving Base Currency and Quote Currency

It acts as the reference against which the value of the second currency (the quote currency) is measured. For example, in the currency pair EUR/USD, the euro (EUR) is the base currency. This indicates how many U.S. dollars (USD) are required to buy one euro. It serves as the reference against which the value of the second currency (the quote currency) is measured.

When the base currency (EUR) is strong, it takes more of the quote currency (USD) to buy a single unit of the base currency. This means that a trader has to use more U.S. dollars to buy a single Euro. The base currency and quote currency in Forex are used to arrive at the exchange rates.