Summary:
Understanding base and quotation currencies is essential in the forex market. Learn more about these key concepts and how they impact currency trading.
Forex trading refer to buying and selling currencies of different countries. The base currency and quoted currency are the two components used to represent currency pairs in forex trading.
When trading in the forex market, there are always two currencies involved: the currency you want to sell and the currency you want to buy.
Base Currency refers to the first currency in a currency pair, also known as the trading currency or primary currency. It is the currency used by traders to purchase or sell the quoted currency. The base currency is usually a relatively stable and highly liquid currency, such as the US dollar, euro, pound sterling, etc. In forex quotations, the base currency is usually located in front of the currency pair; for example, EUR in EUR/USD is the base currency.
Quote Currency refers to the second currency in a currency pair, also known as the pricing currency or secondary currency. It is the currency used by traders to price and exchange. The value of the quoted currency is determined based on the base currency. The quoted currency is usually a relatively unstable and illiquid currency, such as the Japanese yen, Australian dollar, Canadian dollar, etc. In forex quotations, the quoted currency is usually located after the currency pair; for example, the USD in EUR/USD is the quoted currency.
When trading currency pairs, the displayed exchange rate reflects the price of buying or selling a unit of the base currency in the selling or buying quotation currency.
If you short a currency pair, then you sell the base currency, and the currency you buy is the quoted currency. When trading long, you sell the quoted currency to buy the base currency.
For example, in EUR/USD, USD is the quoted currency, while EUR is the base currency. If the price of the currency pair is 1.1200, it means you need to purchase 1 euro for $1.12.
If the base currency appreciates or the quoted currency depreciates, the number of US dollars required to purchase one euro will increase. If the base currency depreciates or the quoted currency appreciates, the opposite effect will occur.
The choice of base currency and quotation currency is very important for forex traders. Traders make decisions to buy or sell a certain currency based on market analysis and predictions. They need to understand the exchange rate fluctuations between the base currency and the quoted currency in order to make informed trading decisions.
Each currency pair has its own characteristics, and the fundamental and technical analysis that traders must perform may vary depending on the currency pair being traded.
Generally speaking, as a leading global currency, the US dollar plays the role of a base currency, especially in the case of exotic currency pairs. However, there are also some currency pairs quoted in US dollars, such as EUR/USD and GBP/USD.
Disclaimer: Investment involves risk. The content of this article is not an investment advice and does not constitute any offer or solicitation to offer or recommendation of any investment product.
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