Glossary · What is forex?Base currency
The base currency is the first currency in a currency pair, the one whose price is quoted. In EUR/USD it is the euro, so a price of 1.10000 means one euro costs 1.10000 US dollars. Buying the pair means buying the base currency.
Every currency pair names two currencies, and the one written first is the base. The buying and selling lesson shows what a trade does to each side of the pair.
What the base currency tells you
A pair's price is always the cost of one unit of the base currency, counted in the quote currency. In USD/JPY at 150.00, the base is the US dollar, and one dollar costs 150 yen.
When you buy a pair you buy the base and sell the quote, so you gain if the base strengthens. When you sell the pair you gain if the base weakens.
Why it sets the size of your trade
Forex trade size is counted in units of the base currency. One standard lot is 100,000 units of it, so 1 lot of EUR/USD is 100,000 euros and 1 lot of USD/JPY is 100,000 dollars.
Here is a worked example with illustrative prices. Buying 0.10 lot of GBP/USD at 1.30000 means buying 10,000 pounds. Paid for in dollars, the position is worth 10,000 × 1.30000 = $13,000.
The same 0.10 lot on USD/JPY at 150.00 buys 10,000 dollars. Its value in the quote currency is 10,000 × 150.00 = 1,500,000 yen.
Questions
Is the base currency always the US dollar?
No. The US dollar is the base in pairs such as USD/JPY and USD/CHF, but it is the quote currency in EUR/USD, GBP/USD and AUD/USD.
What is the difference between the base and quote currency?
The base is the first currency in the pair and the quote is the second. The price tells you how much of the quote currency buys one unit of the base.
More terms in this chapter
ForexForex (foreign exchange, or FX) is the global market for trading currencies. Every price is quoted as a pair, such as EUR/USD, and trading happens over the counter between dealers rather than on one central exchange.
Exchange rateAn exchange rate is the price of one currency in terms of another. EUR/USD at 1.10000 means one euro exchanges for 1.10000 US dollars. On a trading platform every rate comes as two prices: a bid you can sell at and a higher ask you can buy at.
Long and short positionsLong and short positions are the two directions a trade can take. Going long means buying a currency pair to profit if its price rises. Going short means selling it to profit if the price falls. In forex you can sell a pair as easily as you buy it.
Over-the-counter (OTC) marketIn an over-the-counter (OTC) market, traders deal directly with no central exchange. Spot forex works this way: dealer banks quote prices to each other and to brokers, so there is no single official price at any moment.
Liquidity providerLiquidity providers are banks and firms that quote buy and sell prices to a broker. They stand ready to trade at those prices. A broker combines their quotes into the bid and ask you see, sometimes adding its own markup to the spread.
LiquidityLiquidity is how easily you can buy or sell an amount without moving the price much. In a liquid market many quotes with real volume sit near the current price, so spreads are tight and orders fill close to the price you see.
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