Forex Base And Quote Currency Explained
In the fast-paced world of Forex trading, learning about Base and Quote currencies is not a bad place to start. For beginners looking to understand how the market works and what the instrument names actually mean, this is the article.
When you open your trading platform for the first time, you might see a chart already loaded on your screen.
Somewhere on that chart, you will see the name of the currency pair you are viewing.
The way it will be written is XXX/AAA. There will be an abbreviation for a currency in the place of “X” and “A,” e.g., EUR (Euro), USD (United States Dollar), GBP (Great Britain Pound).
For example, you might see EUR/USD or USD/JPY on the chart somewhere. That is the name of the currency pair that you currently have open on your chart.
Some of you might have noticed some numbers on the chart fluctuating up and down and might have wondered what those numbers mean. That is the price of the currency pair, and it is the only price.
How can that be? Well, the price that you see is the comparison of the QUOTE currency to the BASE currency. Let me explain.
What is the Base/Quote in a Currency Pair?
Like I explained above, a currency pair structure always has two different currencies that are being compared. EUR/USD or USD/JPY, right?
So in a currency pair, which currency is the BASE currency? The base currency is the first currency you see in the currency pair name.
So in EUR/USD, The euro would be the base currency. The second currency that comes after the forward-slash is the QUOTE currency pair.
In USD/JPY, the Japanese Yen would be the quote currency. We use both the Base and Quote to find the PRICE of a currency pair.
If the price chart of EUR/USD read 1.2000, then it means that is how many US Dollars you would need to purchase 1 Euro.
So the calculation is, how many units of the QUOTE currency do I need to buy 1 unit of the BASE currency. If USD/JPY reads a price of 114.000, then it means the chart is telling me I would need 114 Yen to buy 1 US Dollar.
You don’t need actual foreign currency to trade Forex. In Forex, when you make a trade, you are not trading the real currencies.
So don’t think you own actual Yen or pounds in your trading account just by pressing BUY or SELL on these pairs. In Forex, you are trading contracts for difference (CFDs) which means you and your broker or another trader are just agreeing to pay each other based on who is right about the movement of the price of a currency pair.
How Traders Make Money Trading Currency Pairs
If I bet you that the price of EUR/USD will go up from 1.2200 up to 1.2500 and it does that, You pay me, right? That’s what you do when you trade.
If the price of EUR/USD rises, all that indicates is that the BASE currency got STRONGER OR the QUOTE currency got WEAKER. If the price of EUR/USD falls from 1.2500 down to 1.2200, the opposite applies.
Either the base currency got weaker, or the quote currency got stronger. That’s how we navigate what’s going on when the price is pushing up or down.
Don’t bet the farm.
Don’t lose your shirt.
Cut the L.
Keep the W.
Forex Base/Quote FAQ
The base currency is the first currency name in a currency pair.
The percentage limit that you are allowed to risk per position i.e. you cannot place a trade that would exceed this value.
So a currency pair has two currencies that are compared. The Quote currency is being compared to the base currency. How many units of the quote currency you need to buy 1 unit of the base currency is what the price of that currency pair will be.