In the Forex market, people trade different currencies with other currencies in a process which should yield profit. If anyone has any prior experience in other share markets, they will find the currency exchange market pretty similar to them. The basic mechanics for all share market is pretty similar. However, newcomers will not find the process too complicated. That’s why the market gets millions of newcomers joining every year.
In simple words, after buying an asset, a trader needs to wait for the market to fluctuate. If this fluctuation happens in an unexpected direction, the traders in the Mena region are more likely to lose money. Conversely, an investor takes the win when the market turns to his expected direction. To define a success more precisely, one has to wait for the consolidation of his bought asset price. When the purchased asset’s price takes over the sold asset’s worth, the buyer is set to make some profit.
When buying an asset, a trader has to buy it according to its pertaining pair’s exchange rate. The rate referring to the ratio of one currency against another is the exchange rate for that currency. For instance, with the USD/CHF exchange rate, one can easily understand the purchasable amount of the U.S. dollars with a single unit of the Swiss franc.
Tradable currencies always appear as pairs like GBP/USD. The reason behind their quoted appearance is that, while trading in Forex, a trader just exchanges currencies. That means he buys a currency by selling another. If you ever look at a price pair, think about which is the buyable and which is the salable currency.
Here is more about the concept of the base and quote currencies.
1. Base Currency
Most of the time, unless the screen presents everything on it vertically, a person will see two currencies name’s horizontally, one beside the other. Between them, the one on the left side is the base. To learn more about base currency, you can read some of the free articles on the website of Saxo bank Dubai. This will help you to analyze the market in a much better way which will increase your confidence.
For example, in the GBP/USD pair, the left one is the British pound and it is the base in this pair. This base acts as the reference factor for the exchange rate. It always has a value of 1.
2. Quote Currency
The right currency of a pair is the quote currency of a pair. In the above example, the right and quote currency us the US dollar. An exchange rate indicates the amount of quote an investor has to sell to buy a single unit of the base currency.
Suppose, for the GBP/USD pair, the exchange rate is 1.21228. It means a trader has to pay $1.21228 US dollars in order to purchase £1 British pound.
Again, during selling, a quote represents the amount of base currency speculators have to sell to buy a single unit of the quote currency.
To mark the right selling or buying decision, traders have to pay attention to some details. The basic rules state that:
- If anyone can identify an imminent appreciation in the base against the quote, he should buy the base.
- If anyone can identify an imminent depreciation in the base against the quote, he should sell the base.
Observing the enormous numbers of currencies to trade, one may find it hard to contemplate choosing the best one to trade. However, good news for the traders, the rule-following which currencies make pairs are standardized in the Forex industry. So, one doesn’t have to take extra burden thinking about the difficulty in choosing or creating a pair. Most of them are already paired, and they have different classifications. Once a trader comes to know all about them, he can get rid of all the misconceptions, complications, and doubts that surround the trading of currency pairs.