In the Forex
market, currency is bought and sold in pairs. The theory of Forex trading is to exchange one currency for another in
the hopes that the price will change, for example the currency you bought will increase in value compared to the currency that you sold. The exchange rate of a currency
is simply the ratio of one currency valued against another currency. For example, the EUR/USD (Euro/United States Dollar) exchange rate indicates how many Euros can purchase
one United States dollar, or how many United States dollars you need to buy one Euro.
The reason currencies are always quoted in pairs is because in every Forex
or foreign exchange transaction you are simultaneously buying one currency and selling another. This is
an example of the foreign exchange rate for the Euro versus the United States dollar:
EUR/USD = 1.3979
The first currency
to the left of the slash is known as the base currency (in the example above that is the Euro), while the second currency listed on the right of the slash
is called the counter or quote currency (in the example above that is the United States dollar). In the Forex market when you are buying, the exchange rate tells you how much
you have to pay in units of the quote currency
to buy one unit of the base currency. In the example above, you have to pay 1.3979 United States dollars to purchase or buy 1 Euro.
When you place a sell order, the exchange rate tells you how many units of the quote or counter currency you get for selling one unit of the base currency. In the example above,
you will receive 1.3979 United States dollars when you sell 1 Euro.
An easy way to remember the differences in the currency pairs is that the base currency is the basis for the buy or the sell order. In the example above, you are buying the base currency (EUR)
and simultaneously selling the quote or counter currency
(USD). You buy the pair that you believe the base currency will go up relative to the quote currency and you sell the pair that you
believe the base currency will go down relative to the quote currency.
If the base currency
increases in value it means that base currency is stronger than the quote or counter currency and if the base currency decreases in value that means
the base currency is weakening in relationship to the quote or counter currency.
market, currency is bought and sold in pairs. The theory of Forex trading is to exchange one currency for another in
the hopes that the price will change, for example the currency you bought will increase in value compared to the currency that you sold. The exchange rate of a currency
is simply the ratio of one currency valued against another currency. For example, the EUR/USD (Euro/United States Dollar) exchange rate indicates how many Euros can purchase
one United States dollar, or how many United States dollars you need to buy one Euro.