Foreign exchange (forex) trading happens in pairs where one currency is bought against the sale of another. The first of the two currencies in a pair is called base currency, while the second currency is known as quote currency. It is a way of comparing the value of one currency with another, which means the base currency against the quote currency. It shows how many units of quote currency are needed to buy base currency.
The currency pairs are traded in the foreign exchange market – known as the forex market. The forex market enables traders to buy, sell and exchange foreign currencies. The market also facilitates the conversion of currencies for global trade and investment.
How does a currency pair work?
In the forex market, a currency pair can be bought or sold as a unit. On purchasing a currency pair, you receive the base currency and sell the other one. Similarly, as a trader sells a currency pair, they sell the base currency and receive the second (quote) currency.
Two prices that are relevant in forex trading are ‘bid’ price and ‘ask’ price. When a forex broker buys a base currency from a trader in exchange of quote currency, he pays the ‘bid’ price. On the other hand, when a broker sells the base currency to a trader in exchange for quote currency, the price at which he sells is known as ‘ask’ price.
Most popular forex pair
One of the most commonly traded currency pairs is euro and US dollar, indicated as EUR/USD in the parlance of forex trading. The quotation of EUR/USD equals 1.15 means one euro can be bought for 1.15 US dollars. In other words, 100 euros can be purchased for $115 US dollars. In this pair, euro is the base currency and US dollar is the counter (or quote) currency.
There are scores of currency pairs that trade in the forex market. The currencies that are traded the most against the US dollar are known as major currencies.
As we summarise, we can highlight that foreign exchange trading takes place in currency pairs at the forex market. A pair consists of one base currency and a quote currency. When a pair is bought, the base currency is bought in exchange for quotation (or quote) currency.