Base vs. Quote
In any trade the “Base” is the currency with a value of one. It’s the one where the amount doesn’t change over the duration of the trade. In both Dolly’s and Jimmy’s cases, the value of the other currency remained stable, only the dollar’s value changed.
He opened and closed with 10,000 Euros just as she opened and closed with 10,000 Pounds. It doesn’t matter if the base currency is the one rising or falling in value relative to the quote currency. All that matters is that you understand the base is always one, in comparison to the other currency in the pair.
Its value is your anchor point for the trade.
Quote Currency
The “Quote” is the currency that fluctuates over the course of the trade. It’s the one you’re using to determine the value of the other, the one you’re “quoting” the value in. This is the side you make or lose your money on.
Just as you don’t want the amount of your holdings in the base currency to change, you want the amount of your holdings in the quote currency to change.
You see these descriptions of base and quote currencies every time you exchange money for a trip across the border to Canada or Mexico. You go to the kiosk and they say they’ll give you this much Canadian money for every US Dollar. That’s selling USD/CAD when you get to the border, and then buying USD/CAD when you change your dollars back to come home. If you’ve done that you’ve already had your entry to forex trading.
USD was the base, and CAD was the counter. It’s not hard.
Any currency exchange transaction is a simple ratio, comparing the quote currency to the base to get the exchange rate.
One interesting thing about the forex market is that you can make money whether a forex currency is rising or falling. For any given currency pair, USD/CAD for example, you issue a buy if you think the USD is going up, and issue a sell if you think the USD is going to go down.
The Long and Short of IT
We’re going to share a secret. Forex traders are like everyone else, they like to use different words for things than the rest of us. They’re no different than sailors that way, except that they have less jargon and it’s not as colorful.
Forex traders don’t buy, they go long; they don’t sell, they go short. Truth is, it doesn’t really matter what they call it, it’s all the same thing.
Going Long:
When you go long, you’re buying one forex currency in the expectation it’s going to go up in value, and you’ll be able to sell it back for more of the other forex currency than you paid for it.
Going Short:
When you go short, you’re selling that forex currency in the expectation it’s going to go down in value, and so you can buy it back for less than it was worth and pocket the difference.
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