Base and Quote Currencies - October 29, 2007
Forex Illustration – Base and Quote Currencies
We have explained earlier that Forex is essentially buying one currency and selling another. Just like the stock market, the buying and selling mechanism in forex market is simple. Anyone should be able to pick up quite quickly.
Similar to stocks, you exchange one currency for another in anticipation of a price change. Since you are trading in currency pairs, when you buy currency A, you hope that currency B will drop in value against currency A.
A simple example here – the EUR/USD indicates how many US dollars one Euro can buy.
How to Read an FX Quote?
Currencies are quoted in pairs such as USD/JPY and GBP/USD. When you buy one, you are actually selling another. Take for example the currency pair British pound sterling versus the US dollar. GBP/USD = 1.7400. The first currency to the left of “/” is the base currency (the British pound) and the currency to the right of “/” is the quote currency (US dollar in this case).
When you buy, the exchange rate tells you how many units of the quote currency you need to pay to buy 1 unit of the base currency. In this example, you have to pay 1.74 USD to buy 1 British pound.
When you sell, the exchange rate tells you how many units of the quote currency you will get for selling 1 unit of the base currency. Using the same example, you will receive 1.74 USD when you sell 1 British pound.
When you indicate “buy” for the EUR/USD pair, this means you are buying the base (EUR) currency and selling the quote currency (USD). You would buy this pair if you think that the base currency, EUR would appreciate versus the quote currency (USD). Likewise, you would “sell” the EUR/USD pair if you think that EUR would drop versus the USD.
It does not sound too complicated right?
There is a forex trading software that comes complete with a step by step manual on how to trade forex. In fact, it tells you exactly what to buy and when to buy the currency pair. It works even for a novice forex trader. You do not need any information as the forex trading software works it out for you but as always, know what you are doing.
Did you know that you can take a look at the forex trading software here at ForexTrading-MadeEasy.com?
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