One of the forex trading basics is quoting currency exchange rates where the base currency is always the USD is called the European terms. The terms serve as an alternative to the American term.
It is used to quote forex which refers to the amount of foreign money needed to get one US dollar. In this post, we will dig deeper about it, the meaning, history, and the example in forex trading.
European Terms, the Introduction
When it comes to quoting currency pairs, the quote currency and the base currency are the two things that establish the price. The currency pair consists of quote and base currency.
For instance, USD/EUR (direct quote). The USD is always the base position in European terms. It means, to buy one U.S. dollar, a certain amount of foreign currency is needed.
This type is an indirect quote. For example, if there is a USD/EUR bid quote at 0.829 and a USD/EUR ask quoted at 0.831. From the perspective of the United States, this quote is given in European terms.
The first indicates that the maximum amount will be paid by the buyer is 0.829 euros for one U.S. dollar. While the second indicates the minimum amount a seller is willing to accept for one dollar which is 0.831 euros.
Despite the quote convention, when you purchase a currency pair, it means that you buy selling term currency and base currency. Conversely, you are buying the term currency and selling the base currency when you sell a currency.
The European Terms and Forex Trading Basics
Currencies are traded in through foreign exchange (forex) trading. The forex market is the most liquid and largest market around the world.
By exchanging currencies, traders can generate profits as well as the way they trade any other asset. The goal is to purchase a currency low and sell it at a high price when looking for a positive return.
Understanding the term the currencies are represented in is essential for investors when trading forex. The currencies that are traded against USD are reported in European terms or American terms in accordance with standard practice.
Forex Trading Basics, the Example
We will take an example, CHF (Swiss France) is traded in the spot market in European terms. The USD/CHF is the representation of the currency.
On the other hand, the GBP/USD (the British Pound) is traded on the futures market in American terms. Often the quote convention between spot and futures is different. Traders should know this to understand the right direction of the trade.
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