On the forex market, currencies are quoted in pairs. For example, EUR/USD. The first currency is known as the base currency while the second currency is the quote currency. When you buy a currency pair, it means that you have bought the base currency and sold the quote currency. On the other hand, selling a currency pair means that you have sold the base currency and bought the quote currency.
Base Currency
This is the currency listed first. The price of a currency pair represents the amount of quote currency needed to buy 1 unit of the base currency. For example, let’s say you have EUR/USD at 1.0675. The EUR is the base currency and USD is the quote currency. The currency pair price is 1.0675. This means that for 1 EUR, you will get 1.0675 USD. In a long position, you’re anticipating that the price will rise above 1.0675 from the example above. In a short position, you’re expecting the price 1.0675 will drop.
Quote Currency
This is the currency listed as the second one. It is also referred to as counter currency. For example, let’s say you have USD/CAD at 1.4504. USD and CAD are the base and quote currencies respectively. The price 1.4504, means that you need 1.4504 CAD to get 1 USD. In this example, if the price rises above 1.4504, then it means the base currency has increased in value. This will lead to an increase in the amount of CAD needed to buy 1 USD. On the other hand, if the price drops below 1.4504, then a less amount of CAD will be needed to get 1 USD. This is due to the decrease in the value of the base currency against the quote currency.
Conclusion
Understanding how forex currency pairs work is an important part of learning how to trade. It will help you understand price movements and calculate your potential profits when trading.
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