What Is a Counter Currency?
The term counter currency alludes to the reference or second currency in a currency pair. Counter and base currencies are part of the currency or foreign exchange (forex) market. A trader or investors can determine the amount of the counter currency they need to sell to purchase one unit of the first or base currency. The counter currency is listed after the base currency in the pair when currency traders analyze ISO currency codes.
How Counter Currencies Work
The currency or forex market is one of the biggest and most liquid markets in the world. Investors trade trillions of dollars worth of currencies in this market every day. It comprises of an electronic network that comprises of banks, brokers, traders, and institutions, instead of a centralized location like a stock exchange.
Currencies are listed in pairs on the forex market. This combination is called a currency pair. The primary currency is called the base or transaction currency while the subsequent one is the counter or quote currency. In the forex market, traders determine the amount of the counter currency is required to buy one unit of the first or base currency. Assuming you look into a currency pair utilizing ISO currency codes, the counter currency is the one that follows the base currency.
Traders and investors ought to comprehend how currency pairs are structured to comprehend forex trading. The first or base currency is equivalent to one monetary unit, for example, one dollar or one euro. Buying one euro in an EUR/USD currency pair means they receive a single euro by selling a certain number of [U.S. dollars](/usd-US dollar). In this model, the euro is the base currency while the dollar is the counter currency.
At the point when an investor buys or goes long on a currency pair, they sell the counter currency yet in the event that they short a currency pair, they buy the counter currency.
Currency pairs — both base and counter currencies — are impacted by a number of various factors. A portion of these incorporate economic activity, the monetary and fiscal policy ordered by central banks, and interest rates.
Major currencies, like the euro and U.S. dollar, are bound to be the base currency as opposed to the counter currency in a currency pair, especially with regards to trades in exotic currencies. The most regularly traded currency pairs on the market in 2021 were:
As verified over, the first currency in quite a while is the base currency while the subsequent one (after the slice) is the counter currency. In the GBP/USD pairing, the pound is the base currency or the one that is being purchased while the dollar is the counter currency. This is the one that is being sold.
Illustration of a Counter Currency
We should expect a trader needs to purchase \u00a3400 utilizing U.S. dollars. This would include a trade utilizing the GBP/USD currency pair. To execute the trade, they need to figure out the number of USD (the counter currency) they need to sell to get \u00a3400.
The exchange rate for the pair toward the finish of the trading day on June 3, 2021, was 1.4103. This means it cost the trader $1.4103 to purchase \u00a31. To complete the transaction on that day, the trader needed to sell 564.12 units of the counter currency to get 400 units of the base currency or $564.12 for \u00a3400 (400 x 1.4103).
- Traders determine the number of units of a counter currency they that need to sell to purchase a single unit of the first or base currency.
- To determine the number of units of the counter currency you that need to sell, duplicate the total number of units in the base currency by the exchange rate.
- The counter currency follows the base currency in ISO currency code pairs.
- A counter currency is the second or reference currency in a currency pair.
- Major currencies are bound to be the base currency in a pair, especially while trading exotic currencies.