Sun, August 14, 2022

What is the base currency in the forex market?

Wibest Broker- Currency Pairs: A keyboard is shown, displaying the major currencies on the separate keypads.

Are you another Forex enthusiast who wants to learn all the secrets of this popular online business to maximize your profits? In that regard, do you like to understand the base currency in the Forex market, how to get started with it and turn it into a long-term professional career that will enable significant profit growth in the future?

Moreover, to learn the base currency and quote currency is, and to get to know what is the base currency formula, it is necessary to understand what Forex is in general in the first place. In short, Forex represents the acronym for foreign exchange market for currency pair exchange.

Forex trading is known as the process of exchanging one currency for another in order to purchase goods and services. It’s done on the foreign exchange market, the biggest decentralized financial market in the whole world. Each day more than 6 trillion transactions are happening on the market, which is open to Forex traders 5.5 days a week, 24 hours a day.

Now that you’ve got all the basic information about the Forex in general let’s find out the base currency.

Base currency – Definition and explanation

Before all, keep in mind that currency unit prices are quoted as currency pairs in the Forex market. The base currency, or in other words, the transaction currency, represents the first currency in a pair quotation. It is followed by the second part of the quotation which is called the quote, or counters currency.

In order to see the base currency example, let’s imagine that one particular company is able to use the base currency as the domestic currency for accounting purposes. The reason for that is to represent profits and losses in general. In the foreign exchange market, the base currency is there to show how much of the quote currency is necessary in order to get a straightforward unit of the base currency.

On the other hand, quote currency represents the second currency in one currency pair on the Forex market.

Example of a base currency and quote currency

Let’s take into account the CAD/USD currency pair. In this case, the Canadian dollar (CAD) is the base currency, while the U.S. dollar (USD) is the quote currency. The International Organization for Standardization, or shortly – ISO, is responsible for prescribing the abbreviation for currencies. These particular codes are provided in standard ISO 4217.

These codes are used by currency pairs and are made of three letters: USD, EUR, CAD, GBP, etc. Sometimes, currencies of a currency pair are separated with a slash (/) character, which is also able to be replaced by a dash, period, or simply nothing at all.

What are the major currency codes?

Among numerous currencies out there, several top currencies are considered to be the major ones. Here is a list of significant currency codes at the moment:

  • USD – U.S. dollar
  • EUR – Turo
  • JPY – Japanese yen
  • GBP – British pound
  • AUD – Australian dollar
  • CAD – Canadian dollar
  • CHF – Swiss franc

Base currency vs local currency

It’s essential to remember that each business unit in this world needs to have one base currency. It is usually the local currency of the organization. However, according to accounting rules or some other circumstances, it is not always the case. In some processing concepts, you can assign a base currency to every warehouse business unit.

How to write currency pairs in Forex

Currency pairs in Forex are written as XXX/YYY or simply XXXYY. In this example, the base currency represents XXX, while the YYY refers to a quote currency. The most famous examples of these particular formats are the following ones:

  • EUR/USD
  • GBP/AUD
  • USD/JPY
  • GBPJPY
  • EURNZD
  • EURCHF

What do currency pairs indicate?

Once provided with an exchange rate, which represents the value of one nation’s currency of another country, currency pairs indicate what is the necessary amount of the quote currency in order to purchase a unit of the provided base currency.

Here is one example of it:

  • EUR/USD = 1.55.
  • €1 is equal to $1.55.

From the example right above, you can see that it directly says that in order to buy €1, one must pay $1.55. If you don’t know how to read the currency pair quotation, it’s essential to do it the same way when you are selling the base currency. For instance, in case one seller is up to sell €1, he’ll receive $1.55 for it.

The most accessible currency pair to trade in Forex

At the moment, the most manageable currency pair to trade in Forex at the moment is EUR/USD. Besides being the most straightforward currency pair, it is also the most stable one on the foreign exchange market. It is considered to be the best choice for traders regardless of their level of experience.

Due to tight spreads and liquidity, the EUR/USD currency pair is currently the most traded one. However, this particular currency pair comes with extremely high volatility, making it hard to predict. Almost every broker, bank, and other financial institution uses the EUR/USD currency pair. It’s also the most profitable currency pair on the market at the moment.

Although this particular currency pair became considered one of the most traded instruments, any trader can choose a currency pair that also has liquidity and tight spreads.

Who is trading currencies and for what reason?

Forex market participants are taking advantage of Forex in order to hedge against international currency and interest rate risk. The reason for that is speculation on geopolitical events and diversification of portfolios.

The most prominent players in the Forex market are commercial and central banks in the first place, hedge funds, and money managers. However, individuals are just a tiny portion of all Forex volume, and they are mainly using the Forex market in order to day trade and speculate.

Also, it’s essential to keep in mind that global corporations are also using the Forex market in order to hedge currency risks from foreign transactions.

Where to start with trading Forex? Try opening an account with the best broker for beginners.

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