September 21, 2021

Forex: Base Currency Explained

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Forex Trading is amongst the most popular investment plans people put their investment money into. Millions of participants worldwide put their money in the foreign exchange market because of its liquidity and popular currency choices. Currency trading can be tricky; even for experienced traders, they still need to keep learning about forex trading.  How about when you’re new in forex trading? The best method for new traders is to keep reading forex-related stuff online and learn from their early stages of trading. So, how about let’s start talking about forex and your base currency. This article will explain what base currency is and how important it is that you understand this part of your forex career.

What is Forex and The Forex Market?

Forex is one of the oldest financial markets still in operation. It’s also one of the more secretive. If you want to participate, though, it’s easy to follow. Follow the money, and you’ll discover how vital Forex is to everyone, from small traders to major international institutions. It’s not a complicated concept. Simply put, if you want to buy a currency, it’s usually necessary to have someplace where you can cash out your profits when you’re satisfied with your investment.

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Forex markets, also known as financial markets, are where traders buy and sell currencies to profit from changes in exchange rates. Traders can buy or sell currencies using either cash or financial instruments called futures. This can include dollars, pounds, euros, yen, and other currencies. Financial instruments are specifically designed to permit or invest in certain assets or companies without actually owning the actual assets or businesses. This results in a profit or loss depending on how accurately the instruments are managed.

Base Currency

Guess where the base currency, USD/CAD is. A base currency is the first currency used as the main or benchmark unit of value for a particular market. Unlike a quoted currency, which is listed against another currency, the base currency is rarely quoted against another currency in financial markets. For example, USD (United States Dollar) is the base currency for the price of a USD/CAD (Canadian Dollar) foreign exchange contract.

Other examples of base currencies in currency pairs:

–       USD/MXN

–       MXN/PHP

–       USD/GBP

Note that currency pairs are written in XXX/YYY. The base currency is written XXX/- while the quote currency (the one you’re trading your base currency against is in YYY). In this case the examples provided above show that the base currency is USD, MXN, and USD; basically the first pair you see is the base currency. Currency pairs are provided by an exchange rate. What is the exchange rate you may ask? The exchange rate is the indication on how much the quote currency you need to buy the base currency. For example, the USD/PHP pair. You want to buy or trade your 1,000 USD to Philippine pesos. Before you can trade your USD, the quoted currency must be equal to your $1000. This means the transaction here is between $1000 to PHP 51,000. This means USD 1000 is equal to PHP 51,000.

Key Takeaway

In Forex Trading, to be successful, you must be aware of the events of your currency pairs. Why trade it in the first place? In the example above, if you feel like the Philippine peso will increase in value, then buy it in its current state, then sell when the value increases. This is how forex trading works in a nutshell; you buy and sell currencies for profit.