When trading foreign currency exchange, you will always see currencies represented in pairs. The first currency quoted in the pair is the base currency (also known as the primary currency). The second currency in the pair is the quote currency (also known as the counter currency).
You buy when you think the base currency will strengthen relative to the quote currency and sell when you think the base currency will weaken relative to the quote currency.
If we look at the EUR/USD, the USD is the quote currency. If you buy the pair and the euro rises versus the US Dollar, you will make a profit. If the Euro drops in value versus the US Dollar, you will incur a loss. It is useful to understand the reasons individuals might choose to trade forex over more traditional investments.
Forex trading is frequently referred to as “trading” because many active participants in the forex market tend to do short-term, intraday trades.
This is partly because, unlike some other financial markets, there are usually significant price fluctuations in the forex market during any given trading day which is magnified by the availability of leverage.
Key takeaways:
- In a currency pair, the first currency quoted in the pair is the base currency (also known as the primary currency).
- In a currency pair, the second currency in the pair is the quote currency (also known as the counter currency).
- There are usually significant price fluctuations in the forex market during any given trading day.