Base currency definition

In this article, we will look at the history of the Forex market and figure out how it works. We will also study the main market participants and analyze the reasons Forex is so popular among ordinary traders. Professional traders tend to operate between these two extremes and use every trading opportunity regardless of the chosen trading instrument. In an indirect quote, the dollar becomes the quote currency against the base national currency. For example the EUR/USD shows how many dollars you need to buy 1 euro. For example, while historically Japanese yen would rank above Mexican peso, the quoting convention for these is now MXNJPY, i.e.

The second part of the currency quotation is called the quote currency or the counter currency. When you trade currencies, you go long the base currency and short the other. Local shifts in interest rates, trade deficits, and economic growth can all be reasons to favor one currency over another. Any information posted base and quote currency by employees of IBKR or an affiliated company is based upon information that is believed to be reliable. However, neither IBKR nor its affiliates warrant its completeness, accuracy or adequacy. IBKR does not make any representations or warranties concerning the past or future performance of any financial instrument.

Currency pair

The base currency can be used to represent all profits and losses of a company. This currency also functions as a company’s domestic currency for accounting purposes. However, for the convenience of traders, on the foreign exchange market it is customary to indicate the type of quote regardless of location. Therefore, even for a trader from the United States, the EUR/USD pair will be considered an indirect quote. Currency pairs that do not include USD are called minor pairs, minors or crosses.

• Ltd can only use INR as the base currency, and accounts opened via Interactive Brokers Securities Japan, Inc. can only use JPY as the base currency.
• A currency pair is the quotation of the relative value of a currency unit against the unit of another currency in the foreign exchange market.
• There are as many currency pairs as there are currencies in the world.

The first currency listed is referred to as the base currency; GBP and EUR would be the respective base currencies for the above examples. 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. Generally, to help traders recognize them without learning every name by heart, the first two letters represent the country name, and the third is the currency name. For example, USD stands for the United States dollar, GBP is the Great Britain pound, etc. We introduce people to the world of trading currencies, both fiat and crypto, through our non-drowsy educational content and tools. We’re also a community of traders that support each other on our daily trading journey.

By posting material on IBKR Campus, IBKR is not representing that any particular financial instrument or trading strategy is appropriate for you. The risk of loss in online trading of stocks, options, futures, forex, foreign equities, and fixed income can be substantial. Before trading, clients must read the relevant risk disclosure statements on IBKR’s Warnings and Disclosures page.

Types of pairs: majors, crosses, and exotic

When a trader buys a currency pair they agree to obtain the base currency in exchange for the quote currency. For example, if you click “Buy” on the XRP/USDT currency pair in the TabTrader app, you will be receiving Ripple tokens and selling Tether stablecoin tokens. The market maker earns the spread, or difference between the two prices. The quote for the currency pair shows how much of the quote currency it takes to purchase one unit of the other. The quote currency is always in comparison with the base currency. So, setting a base currency becomes imperative to the whole trading process in the foreign exchange process and any purchases or accounting decisions being made by a company.

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TRY/USD (Turkish lira/US dollar) qualifies as an exotic currency pair. Cross-currency pairs are currency pairs that do not feature the US dollar. This type of currency pair may also be included in the ‘minor’ category. One example of a cross-currency pair is GBP/JPY (British pound/Japanese yen). Currency pairs provide an insight into the amount of quote currency needed to purchase one unit of the base currency. Different currencies are identified by their ISO codes – internationally recognized unique three-letter symbols (eg. EUR for the euro, USD for the US dollar).

Moreover, since major currencies are less volatile and have more liquidity, they are more suitable for scalpers and daily traders. In contrast, the cross and exotic currencies are ideal for swing traders due to increased volatility. The base currency, which is also known as the transaction currency, is the first currency appearing in a currency pair quotation. With rapidly evolving technology and e-commerce taking over the world, all businesses operate much higher than before. Most companies are working with international suppliers and customers. Their products and services are marketed to an audience belonging to different regions.

The difference between the bid-ask prices and the reasons behind it

It also enables the conversion of currencies for international trade and investment. The forex market is open 24 hours a day, five days a week (including most holidays), and sees a huge amount of trading volume. An accounting term used to refer to the currency in which an investor maintains its book of accounts. As part of an IBKR account, each client specifies a single base currency which determines the currency of translation for statements and the currency used for determining margin requirements. If the client elects to maintain a cash or IRA account, then they are restricted to holding only long cash balances regardless of the currency of denomination. Clients maintaining a cash or margin account may change their base currency at any time in Client Portal and may make deposits or withdrawals in a non-base currency.

By convention when an exchange rate is named, the base rate is spoken or written first, and the variable currency second. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. Find out more about forex trading and how leverage in forex works. Today the traders should pay attention to the Retail sales in Canada. You can check out the full list of cryptocurrencies traded on all the major exchanges in the TabTrader app.

Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice. In currency pair Forex quotes, the first currency is called the base currency, while the second one is called the quote currency. They represent how much you need to spend to buy a base currency vs quote currency. A base currency calculates how much quote currency would be required to match one single unit of the base currency. For example, if we have a currency pair made of U.S. and Canadian dollars (USD/CAD), the USD is the base currency that would determine the estimate of the quoted currency.

#4: What is a base and quote currency

The price of a forex pair reflects how much it costs to purchase one unit of the base currency by selling the quote currency. Exotic currency pairs consist of one major currency and one currency, representing the developing (Brazil, Mexico, India etc.) or small (Sweden, Norway etc.) economy. Exotics are rarely traded on Forex and usually have less attractive trading conditions.

The base currency is also important for calculating profit and loss in forex trading. The base currency is always equal to one unit, and the value of the quote currency is expressed in relation to the base currency. For example, if the USD/EUR exchange rate is 1.20, it means that one euro is worth 1.20 US dollars.

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Buy a pair if bullish on the first position as compared to the second of the pair; conversely, sell if bearish on the first as compared to the second. Currency pairs are characterized by their bid and ask (offer) prices. This article explains how trading apps work and offers an approach to reading lists of trading assets. We cover the difference between base and quote currencies and give an overview of all the key currency pairs on the market. Currency pairs are used because you are always selling one currency and buying the other. When you buy a currency pair from a forex broker, you buy the base currency and sell the quote currency.

This may seem like a large minimum investment (and it is), but currency trading can have margin factors as low as 2% depending on the currency pair. That means if you trade one lot with dollars as the base currency, you only need $2,000 in the account to control $100,000 in the trade. The currency pair is spelled out as the three-letter abbreviation for the base currency, then the abbreviation for the counter currency. There are several “major” currency pairs that are traded most often; foremost among those is USD/EUR. The base currency is the first currency listed in a currency pair, such as USD/EUR (where the U.S. dollar is the base currency). If you are “long” the currency pair, you expect the base currency to rise in terms of the quote/counter currency.

Currencies from developing or emerging market economies that are paired with a major currency are called exotic currency pairs. These pairings are known to be more illiquid and come with wider spreads; thus, making them riskier. When trading currencies, you’re selling one currency to buy another. Conversely, when trading commodities or stocks, you’re using cash to buy a unit of that commodity or a number of shares of a particular stock. Economic data relating to currency pairs, such as interest rates and economic growth or gross domestic product (GDP), affect the prices of a trading pair.

The margins depend on the market value and can even be as low as 2%. At that rate, if you are trading one lot with USD as your base currency, you can control $100,000 in the trade with $2,000 in your trading account. Every novice trader usually wonders which pairs are best suited for trading?

For example, in the EUR/USD currency pair, the US dollar is the quote currency which shows how much US dollars is necessary to buy one euro. When traders say they want to buy a EUR/USD currency pair (or any other), they actually want to sell their dollars and buy euros with that. A base currency is an essential part of the currency pair needed in the international e-commerce market and forex trading.