Financial Market and US Dollar

Trading Glossary: Quote Currency and Base Currency Explained

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The quote currency is basically the second currency listed in a currency pair and is used to define the value of the base currency.  A currency pair ​​measures the value of one currency against another. Currencies are defined as the base currency and secondary quote currency. 

What is Quote Currency and Base Currency?

A base currency is the first currency in a currency pair. Also known as the transaction currency.

The quote currency is the currency being used to pay for the transaction, and it is also known as the counter currency or secondary currency.

When trading a forex pair, the prices are shown (the exchange rate) reflect how much it costs to buy/sell one unit of the base currency by selling/buying the quoted currency.

For example, in the EUR/USD pair the US Dollar is the quote currency, while the first currency (Euro)is referred to as the base currency. If the price of the pair is 1.1200, this means that then you need $1.12 to buy 1 Euro.

If the base currency increases in value or the quoted currency drops, the amount of dollars needed to buy one euro will increase. The opposite effect will occur if the base currency drops in value or the quote increases.

Quote and Base Currency Explained

Understanding the pricing and quotation for currency pairs is very essential in forex trading. Currency pairs are affected by different fundamental and technical factors that affect the exchange rate.

Top major currencies, like the US Dollar, are more likely to be the base currency, especially in the exotic pairs. However, there are pairs where the USD is the quote currency, for instance, like in EUR/USD and GBP/USD pairs. 

How Does Currency Pairs Work?

Buying and selling currency pairs in the forex market always involves two currencies: the currency you’re paying with (the one you’re selling) and the currency you’re buying. That’s why currencies are traded in pairs. 

If you’re selling the pair, then you’re selling the base currency, and the currency you’re buying is the quote currency. While in buying, you’re selling the quoted currency to buy the base currency. 

Bid and Ask Prices

The bid price is the price that the trader is willing to pay for the traded asset. For example, if a trader wants to buy a currency pair, then the bid price will be the price he has to pay. The bid price represents the highest price that a trader is willing to pay for the traded asset.

The ask price is the price that the trader is willing to receive from selling the traded asset. For instance, if a trader wants to sell a currency pair, then the ask price is the price he will get. The ask price represents the lowest price that a trader is willing to sell the traded asset for.

Understanding the current price is essential to understand the difference between the bid price and the ask price. The current price, also known as the market value, is the actual selling price of an asset on an exchange. It is the last traded price of that asset and is constantly fluctuating. The current price is determined by the market forces of supply and demand. Changes to either supply or demand make the current price rise or fall.

Bid-Ask Spread

Bid-ask spread is the difference between the bid price and the ask price of an asset. The difference between the two prices defines the spread. The larger the gap, the higher the spread. Spread values can be very small in a high liquidity market, but when the market is less liquid, spreads will be wider.

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In the financial market, there is always a wide range of factors including uncertainty, liquidity, risk tolerance, and investment capital which an individual trader needs to study before choosing the best suitable trading strategy. In order to increase their chance of gaining profit, forex traders should learn forex with a focus on mastering different types of strategies.

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