The base currency is the one that is quoted first in a currency pair.
Using EURUSD as an example, the Euro would be the base currency. Similarly, the base currency of GBPUSD is the British pound (GBP).
By process of elimination, you know that the quote currency is the one that comes second in a pairing.
For both the EURUSD and the GBPUSD, the US dollar is the quote currency.
You Can’t Make Money if They Don’t Move
There are essentially two ways in which any currency pair can move higher or lower.
- The base currency can strengthen or weaken
- The quote currency can strengthen or weaken
Because the Forex market never sleeps and thus currency values are always changing, both the base currency and quote currency are in a constant state of flux.
In our example, if the Euro (base currency) were to strengthen while the US dollar remained static, the EURUSD would rise. Conversely, if the Euro weakened the pair would fall, all things being equal.
If on the other hand, the US dollar (quote currency) were to strengthen, the EURUSD would fall. And if the USD weakened, the currency pair would rally as the Euro would gain relative strength against its US dollar pairing.
All of the hypotheticals above assume that nothing else has changed for the pair.
The Dynamics of Buying and Selling Currencies
One area that often confuses traders is the idea of buying and selling currencies.
In the stock market, you can either buy (and sometimes sell) shares of stock. There are no pairings, and the value of one stock is not dependent on that of another.
However, in the Forex market, all currencies are paired together. So when you’re ready to place a trade, are you buying or selling?
The answer is both.
For example, if you sell the EURUSD (also referred to as going “short”), you are simultaneously selling the Euro and buying the US dollar.
Conversely, if you buy the EURUSD (also referred to as going “long”), you are buying the Euro and selling the US dollar.
If not, feel free to review this section as many times as necessary.
To clarify, this does not mean you have to place two orders if you want to buy or sell a currency pair.
As a retail trader, all you need to know is whether you want to go long or short. Your broker handles everything else behind the scenes.
There’s also only one price for each pair. Remember that a currency’s value depends on the currency sitting next to it.
At this point, you should have a firm understanding of what a currency pair is as well as the dynamics of buying and selling.