Currency Trading: Understanding Currency Pairs and difference between base and quote currency explained.
Currency Pair explained :
Which currency pair have you traded most?
Currency trading: Currency pairs explained
Simple explanation of technical terms in currency trading to make it easier for anybody who is interested but is confused with the technical jargon.
1. What do you mean by Currency pairs?
Currency pair is a combination of two currencies. For instance, EUR/USD is a currency pair.
The left side currency in the pair, is called base currency. In this example, EUR is the base currency.
The right side currency in the pair, is called quote currency. In above example, USD is the quote currency.
Currency pair acts as a single entity in the currency market which can be bought and sold.
2. What is the difference between base and quote currency?
Function of Base Currency:
New traders are often confused and make mistakes as when they buy currency pair, they don't understand what exactly they are buying. Similarly, when they are selling, which currency out of two, are they selling?
When the currency pair is bought, the base currency is bought.
When the currency pair is sold, the base currency is sold.
For instance, when the EUR/USD is bought, it is EUR that is bought and when the pair is sold, it is EUR that is sold.
Function of Quote Currency:
Quote Currency is the means of payment.
When the currency pair is bought, the quote currency is given.
When the currency pair is sold, the quote currency is received.
For instance, if EUR/USD =0.5. If this currency pair is bought, it implies that 0.5 USD is given to buy 1 unit of EUR. If same currency is sold, it implies 0.5 USD is received to sell 1 unit of EUR.
Common Currency pairs:
EUR/USD, GBP/USD, USD/CHF, USD/JPY, NZD/USD, AUD/USD, USD/CAD, AUD/CAD
3. What is Spread ?
Spread is the difference between the bid and ask price. Bid is selling price and ask is purchasing price.
For instance, if we buy a currency pair and immediately we sell it. Although the price of currency pair is same, but we are still going to lose some money in this dual transaction. This is used to pay the commissions in currency market.
Higher liquidity in currency pair causes spreads to be lower which is good for currency traders. However, if the liquidity is low, spreads can be bigger. This means that you need to gain more from the trade to overcome the initial high transaction cost. Hence, online currency traders are always looking for a good opportunity with high liquidity and thus, smaller spread.
This is a simple Currency Tutorial for new traders trying to understand the technical terms of currency market, especially the currency pairs.
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