It’s All About the Base
In a currency pair, the base currency is the first currency listed. The quote or counter currency is the second currency. Suppose you are long on a currency pair; in that case, you anticipate that the base currency will rise in relation to the quote/counter currency. Conversely, you would expect the opposite if you were short on the pair. Let’s delve into it further as we learn about foreign exchange trading.
Because you buy one currency while selling another in the foreign exchange market, one currency will always be quoted with another. The base currency will be displayed first, followed by the second currency, referred to as the quote or counter currency. The price shown on a chart is always the quote currency; it represents the amount of the quote currency needed to buy one unit of the base currency.
Let’s assume you’re looking at the EUR/USD pair. The euro is the base currency in this example, and the US dollar is the quote currency. If the EUR/USD pair is trading at 1.3000, a single euro costs 1.30 US dollars. When trading forex, you can choose to go long or short. This means determining which currency in the forex pair is considered ‘weak’ or’ strong’ compared to the other currency.
If you open a long position, you are betting that the base currency will rise or the quote currency will fall. So, if you expected the US dollar to fall in value or the euro to rise in value, you would buy EUR/USD. If you were to open a short position, you would do so with the expectation that the value of the base currency would fall against the quote currency. You should place a sell order on the EUR/USD pair if the US dollar is strong.
The quote currency is the currency that appears second in a currency pair quotation. The number of units of the quoted currency equal to one unit of the base currency is expressed. For example, if the EUR-USD is quoted at 1.25, the base currency is EUR, and the quote currency is USD. In this case, one EUR is equivalent to 1.25 USD. The USD is the base currency in most quoting conventions for emerging market currencies: USD-BRL, USD-TRY, USD-RBL, and so on. The quote currency in futures markets, primarily based in the United States, is always the US dollar.
The Forex market is teeming with various currency pairs, each with its characteristics. There are as many Forex pairs as actual currencies worldwide, which is currently around 180. These pairs differ in several ways, including currency groups, liquidity levels, and the amount of spread. The major Forex pairs contain USD (US dollar) as the first or second currency – both the base and quote currency. These are the most actively traded on the market, including EUR/USD, GBP/USD, USD/JPY, etc. In Forex trading, the EUR/USD pair is the most commonly traded asset.
The most liquid assets on the market are the major Forex pairs. That’s because at least one of its components – USD – is currently considered the world currency and is used in every international transaction or measurement. Furthermore, they are much more stable and less volatile. This means that they are associated with fewer spreads.
There are minor Forex pairs, also known as currency cross pairs. So, in minor pairs, what are the base and quoted currencies? They are the currency pairs that do not include the US dollar and instead use other currencies. Minor currency pairs include the EUR/GBP, EUR/JPY, and others. The minor pairs are less liquid than the major pairs, but that doesn’t mean they don’t have enough liquidity. After all, they are national currencies. They have more significant price differences and broader spreads in terms of volatility. While they are referred to as minor pairs, some remain very popular among traders, such as the previously mentioned EUR/GBP, EUR/CHF, GBP/JPY, and many others.