Base Currency
Updated on July 18, 2023
The base currency is the first currency quoted in a currency pair. It is the currency against which the value of the other currency, known as the quote currency, is measured. The base currency is often denoted on the left side of the currency pair. The base currency plays a fundamental role in currency trading as it helps establish the exchange rate and serves as a reference point for determining the value of the quote currency. The exchange rate indicates how much of the quote currency is needed to acquire one unit of the base currency.
How is base currency important in currency trading?
The importance of base currency in currency trading is explained here.
Exchange Rate Quotation – The base currency is fixed at a value of 1, and the exchange rate shows the relative value of the quote currency. For example, if the exchange rate for EUR/USD is 1.20, it means that one euro is equal to 1.20 U.S. dollars.
Profit/Loss Calculation – When trading a currency pair, the base currency is used as the reference for calculating profits or losses. If a trader buys EUR/USD at an exchange rate of 1.10 and the rate increases to 1.15, they would have made a profit of 0.05 U.S. dollars per euro.
Currency Pair Analysis – Traders analyze the base currency to evaluate its strength or weakness compared to other currencies. Economic indicators, geopolitical events, and market trends related to the base currency influence trading decisions and strategies.
Impact on Trading Strategies – The selection of the base currency can impact trading strategies. Traders may choose different base currencies to gain exposure to specific markets or to optimize trading conditions, such as liquidity and available information.
