How does a base currency work? Back to list

Member SinceMar 07, 2022

Posts 155

Seamans

Jun 23, 2022 a 02:10
When trading currencies, traders go long the base currency and short the other. Changes in interest rates, trade imbalances, and economic expansion can all influence the preference for one currency over another.

Traders conduct their business on off-exchange marketplaces and regulated exchanges called forex (short for "foreign exchange").

Pips are incremental quotation units for currency pairs. The pip is the fourth digit in a quote following the decimal point and represents .01 percent of one unit of money. An adjustment of one pip would change the quote from 0.8472 to 0.8473 or 0.8471.

Like stocks, currency pairs have bid-ask prices. Vendors receive bid prices, and buyers pay the requested prices. The market maker receives a spread, or distinction between the two prices. Exchanges compete on spread costs to attract clients.

The spreads on more frequently traded currency pairs, such as the major pairs above, are lower because they are traded more frequently, enabling the exchange to profit from the volume.

Lots, or 100,000 units of the basic currency, are used in trading. This may seem like a sizable minimum commitment, and it is, but depending on the currency pair, margin requirements for Forex trading can be as low as 2%. Using dollars as the base currency, this means that if traders trade one lot, they only need $2,000 in their account to control $100,000 in the trade.

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