Base and quote are two common terms found in the Forex industry. But what do they mean?
Well, currencies are always quoted in pairs.
This is because a Forex transaction is an exchange of one currency to another.
Let’s say a person needs to buy a foreign currency. They need to sell their local currency to obtain the foreign one. The currencies involved in the exchange will be displayed as shown.
The one on the left is called the “base” currency, and the one on the right is called the “quote” currency.
Here’s an example:
Let’s say there’s a trader who decides to buy EUR/USD. When opening a buy position on this pair, the trader is buying the EURO and selling the Dollar.
The opposite would be true if this trader decides to sell EUR/USD. When opening a sell position on this pair, the trader is selling the EURO and buying the Dollar.
Whenever you buy or sell a pair, always refer to the base currency first.
For example, EUR/USD = 1.1700
This means, each euro is worth 1.1700 Dollars. In other words, to be able to get one euro, it costs 1.1700 Dollars.
Basically, one unit of the base currency costs “X” units of the quote currency.
Another common term in Forex trading is “pip”. A pip is the change in the fourth decimal in a pair’s price.
For example, an increase by 1 pip in the EUR/USD rate will lead to a move from 1.1700 to 1.1701. But a decrease by 1 pip in the EUR/USD rate will lead to a move from 1.1700 to 1.1699.
In yen-denominated currency pairs, a pip is the change in the second decimal place.
Let’s say, USDJ/JPY = 135.10
So, an increase by one pip in the USD/JPY rate will lead to a move from 135.10 to 135.11, and a decrease by one pip on the USD/JPY rate will lead to a move from 135.10 to 135.09.