How Profits or Losses are made

Hi All,

I’m struggling to get my head around how a profit or loss is actually made in forex when trading a pair that includes the AUD (as my broker account is in AUD).

For example.
Going Long AUD/USD.

If the AUD does in fact appreciate in relation to the USD, how will my account profit in AUD?

I understand going long in this pair will result in a profit or loss in USD. Therefore if I profit in USD, this profit will need to be reconverted back to AUD, however as it is the AUD that has appreciated my USD profits aren’t worth that much upon reconversion.

Hypothetical Scenario:

Broker Account = In AUD
Exchange Rate = AUD/USD = 1
Trade = Long AUD 1000 units.
If this exchange rate went to 1.10, then the AUD has appreciated 10c to the USD, creating a USD profit of $100.
When the total of $1100 USD is converted back to AUD, how does the AUD profit occur???

Appreciate any assistance.

Cheers,
Lynchaldinho

If you go long AudUsd and price goes up, you gain. If it falls you lose. Your broker will convert it for you, in fact you can withdraw it in usd if you were planning to visit America
You aren’t limited to the currency your account is in, you can trade anything you fancy
Have you tried the free school on here, strongly recommend it

Thanks for the reply Carlos. Much Appreciated. However, I do understand how profits and losses work within the pair being traded and that the conversions are all done in the background by the broker; my struggle is in understanding how that profit is maintained once reconverted back to my local currency, as in the hypothetical trade scenario I mentioned whereby AUD/USD is at parity, if I decided to go long AUD 1000 units. If AUD does appreciate say 10c, then my profit will be $100 USD. Now, that’s a total of $1100 USD I have upon closing out the trade. As my margin account is in AUD, I realise the broker will exchange the USD to AUD in the background). Based on the above scenario, what would my account balance now be as it can’t be $1100 since the exchange rate is no longer 1:1? In this scenario I made $100 USD not $100 AUD. After closing the account this $100 USD needs reconversion back to AUD. As the USD is now weaker to the AUD, my account won’t increase by $100 AUD.

Cheers,
Lynchaldinho

Analysing my Forex Calculator for P&L, it looks as though I may have worked out how my margin account would profit the $100 AUD based on the above scenario.

After having gone Long (Buy) AUD/USD, the subsequent 10 cent appreciation in the AUD/USD pair (creating the new exchange rate of 1.1000 from 1.000) provided a USD profit of $100 upon closure of the trade (selling back AUD to receive USD).
Then, the reconversion rate of this $100 USD back to AUD (as my margin account is denominated in AUD) appears to be based on the trade ENTRY price (1.000) and not the CURRENT exchange rate of 1.1000.
Therefore, as the trade entry price was 1.000 and I made $100 USD, 1.000x100 = $100AUD.

I had confusion because I would have thought the new exchange rate of AUD/USD = 1.1000 would have been the rate required to be used to identify the USD/AUD exchange rate (that being USD/AUD = .9000), thus making the profit calculation .9000x100 = $90 AUD.

Hope this makes sense to anyone who may have been scratching their head like I was.

Lynchaldinho

The account is in AUD and if you make a profit of 1100 USD so to convert back to AUD we will divide $1100/ exchange rate( as per you current rate is now 1.1) so the amount that will be debited in his account will be 1000 AUD. I hope I understood you well.

Hi Andrea, thank you for your response. Much appreciated.
However, after having looked into it a little further I don’t ‘believe’ this is correct, as technically based on your above response (reconversion using new exchange rate 1.100) would have credited the margin account by only $90.I believe the profit in USD will be reconverted back to the account currency (AUD) based on the trade entry exchange rate of 1.000, not the new exchange rate, thereby increasing the account by $100 AUD.

Based on the initial exchange rate of AUD/USD = 1.000
U.S Dollars required to establish Long trade of 1000 AUD = $1000 USD
AUD appreciated to the USD by 10c = $100 USD
Reconverting the USD profit into margin account currency (AUD) calculation = 100(profit)x1.000(trade entry exchange rate) = $100 AUD.

Cheers,