Base and counter currencies
If you want to understand the forex market, one of the things you have to know is the difference between base and counter currencies. Currency pairs are combined in an order, following quoting conventions that evolved over the years to reflect traditionally strong currencies versus traditionally weak currencies, with the strong currency coming first. For example, if you know this, it will help you see why things are written the way they are. For example, a GBP/JPY is a yen cross, but it is written as JPY/GBP because over the years, the process has evolved to list the traditionally stronger currency first, and make it the base currency. The yen is stronger, thus it is called a yen cross, and written with JPY first.
The currency market has its own set of market trading conventions and lingo. Understanding the conventions and lingo of the forex financial market will help you to better trade within that market. Part of that lingo is base and counter currencies. Here is a brief description of what that means in the foreign exchange market, or currencies market.
Base currency-
The base currency is the first currency in the pair. So in a currency pair like JPY/GBP, the yen is known as the base currency. What is the base currency? The base currency is what you are buying or selling when you buy or sell a pair. In pairs, rather than base currency, it is also referred to as the notional or face amount of the trade.
When you buy an amount in euros, such as 100,000 euros, you have sold the equivalent amount in the other half of the trade. If you have a EUR/JPY cross trade, the base currency is the Euros, and when you buy 100,000 euros, you are selling the equivalent amount in yen.
Counter currency-
The second currency in the pair is called the counter currency. This is also referred to as a secondary currency. The counter currency is the denomination of the price fluctuations, and what your profit and losses will be denominated in. In other words, the counter currency, or second position currency, is the oneyour profits and losses are counted in. It is good to know that if you gain a profit, it will come in the currency of the profit. For example, if you trade GBP/JPY and you take a profit, then your gains will come in yen, not pounds.
So why does this even matter? It matters because in order to properly trade in the forex market, you have to know what the base and counter currencies are, and what that means to you when making trades. The more you know, the better you will at choosing a trading strategy, and understanding what your moves make. Base and counter currencies are a big part of the mechanics of currency trading.