What are Currency Pairs?
A currency pair is the standard security that is traded in the foreign exchange market. The value of a currency pair is equal to the exchange rate which is calculated by dividing one currency by the other. The movements of currency pairs are based on market sentiment, which can deviate from second to second.
The first currency in a pair is known as the “base currency” and the second is the “quote currency” or “counter currency.” The base currency is the currency that you plan to buy or sell. The quote currency is the price you would pay for one unit of the base currency. For example, when a currency pair is quoted, it usually looks something like this: EUR/USD 1.3110. This means that in order to purchase one Euro, the buyer must pay US $1.3110. It also means that if a seller wants to sell one Euro, he will get US $1.3110 for it.
There are different rules that are used to calculate a currency pair depending on the type of product you plan to trade. The futures market has one set of rules while the over-the-counter (OTC) and contract for difference (CFD) markets have different rules.
Determining which is the base currency and which is the quote currency is formulated from rules that are set out by the OCD market. The Euro is generally first on the pecking order when it comes to base currencies. Commonwealth currencies, including the British pound, are next. The bottom end is the emerging currencies which are usually the first quote currencies.