Base currency definition

What is a base currency?

A base currency is the first currency that appears in a forex pair quotation. In the foreign exchange market, one currency will always be quoted in relation to another because you are buying one while selling the other.

The base currency will appear first, and will be followed by the second currency, known as the quote or counter currency. The price displayed on a chart will always be the quote currency – it represents the amount of the quote currency you will need to spend in order to purchase one unit of the base currency.

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Examples of a base currency

Let’s say that you are looking at the EUR/USD pair. In this example, the base currency is the euro and the quote currency is the US dollar. If the price of the EUR/USD pair is 1.3000, it means that you would need 1.30 US dollars to buy a single euro.

When you trade forex, you have the option of going long or short. This means that you will need to assess which currency in the forex pair is considered ‘weak’ or ‘strong’ when compared to the other currency.

If you open a long position, you would do so in the expectation that the base currency will rise, or that the quote currency will fall. So, if you thought that the US dollar was going to fall in value, or that the euro was going to rise, you would buy EUR/USD.

If you were to open a short position, you would do so with an expectation that the base currency will fall in value against the quote currency. So, if the US dollar is strong, you would want to execute a sell order on the EUR/USD pair.

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