How to Identify Base and Counter Currencies
When you look at currency pairs, you may notice that the currencies are combined in a seemingly strange order. For instance, if sterling-yen (GBP/JPY) is a yen cross, why isn’t it referred to as “yen-sterling” and written “JPY/GBP”? The answer is that these quoting conventions evolved over the years to reflect traditionally strong currencies versus traditionally weak currencies, with the stronger currency coming first.
According to the market quoting convention, the first currency in a pair is known as the base currency. The base currency is what you’re buying or selling when you buy or sell the pair. It’s also the notional, or face, amount of the trade.
So if you buy 100,000 EUR/JPY, you’ve just bought 100,000 euros and sold the equivalent amount in Japanese yen. If you sell 100,000 GBP/CHF, you just sold 100,000 British pounds and bought the equivalent amount of Swiss francs.
The second currency in the pair is called the counter currency, or the secondary currency. Most important for you as an FX trader, the counter currency is the denomination of the price fluctuations and, ultimately, what your profit and losses will be denominated in. If you buy GBP/JPY, it goes up, and you take a profit, your gains are not in pounds but in yen.