In trading AUD/USD, when you click buy, what are you buying AUD or USD?

Beginner Questions
1

Hi, I m very much a newbie in forex.

I have only traded bit of stocks and cryptos so far in the past 2 years.

In stocks, it is very clear, that for example: When you click / hit buy on the platform, you buy that stock. Like if I make an offer to buy a lot of APPLE share at the lowest available price at USD 411 for e.g. --I buy the APPLE stock, and sell my USD 411 to the seller of that APPLE stock.

In cryto, it is completely clear too, that if Ethereum is priced at ETH/USD = $3300, when you hit buy at the platform, you buy the ETH and sell your USD to the other party.

But I am a little confused now in forex. I have only installed FBS few days ago, set up a demo account (and got $1000 demo dollars on it), and also downloaded & installed Metatrader 5 to trade on that demo account of mine on FBS.

So I selected AUD/USD as instrument, because USD/AUD doesn’t seem to be available on MT5/FBS demo account. The rate of AUD/USD few days ago was about 0.71xx.

I thought when I hit buy on AUD/USD on MT5, I am buying the AUD and selling my USD, ( like what I would be doing in crypto market) and vice versa.

But this morning, after a good cup of coffee and looking at the forex rates online, I was bit shocked (surprised) with what I see on a bank’s rate. For e.g. : EUR/USD is 1.16xx for buy rate and 1.17xx for sell rate, it means buy rate is that The BANK would buy your EURO for OR what I would SELL the EURO / BUY the DOLLAR for.and vice versa.

Can someone tell me which one is correct ? Did I have a wrong assumption few days ago?

Thank you

2

As a private retail forex trader, we’re not buying or selling currency - we are betting on exchange rate movements between two currencies which we select. It doesn’t matter what your account currency is, your bet is with your broker in the location and currency where you and they are - no currency conversions take place for your trade.

3

Thanks for your reply.

Although your explanation seems to be true, since I don’t see any AUD amount show up in my FBS demo account, even after I traded ( bought & sold ) in AUD/USD for a few times already last week, I still can’t understand then, how do we make money by just betting against the broker??

I am sorry I still don’t quite understand how it works.

In cryto, for example: if you believe the price of ETH/USD is gonna go up in the future (few days later for example), you buy the ETH and you get the ETH deposited in your account, which you can sell a few days later when the price goes up. OR if the price goes down / if you believe it will, then you can SELL IT (to CUTLOSS) Or you can just keep it (wait for it to rebound again if there is hope for so).

You are in a sense, also is, betting but by buying / get a hold of some of the ETH, for which you can sell (or even keep) in future (if the price goes up hopefully). --THIS IS THE SIMPLEST thing that I know… since I am just still a noob :smile: .

Am I correct?

Anyway, there is still no explanation about what happen when I click the buy / sell using AUD/USD on MetaTrader? I don’t get the AUD, then what then?

Anyway I am still pretty confused…

4

That’s not strictly true. Most non-advisory brokers are trading with you via CFD - so you never get to own the share certificate - all you own is the difference in the price of the share when you bought the contract and when you sell it back to the broker.

If it happens that the share price has gone up then you make a profit on the contract - or the opposite.

CFD = Contract For (the) Difference between when you buy and when you sell back to the broker.

CFD;s are the same not only for stocks, but also crypto and FX and indeed all instruments.

So if you are thinking in market terms then think how is this contract going to differ in price from when I buy into into it and when I intend to sell out of it.

Edit: CFD’s can be negative or positive - means that you can own a contract that profits when the instrument is below current price (termed as going short or selling) or likewise a CFD that pays out when price is above current price (going long or buying)

1 Like
5

Well first off we’re not betting against the broker, we’re betting against the broker’s other clients, who think that the exchange rate is going to move in the opposite direction to us.

Secondly, forget what happens in crypto, it is not part of the forex market.

In detail, when you buy something you take possession of it. It is a definable asset. You can then sell it to a third party. You are not forced by the dealer to sell it if its value goes down. You can include it in your Will and pass it on to your heirs as part of your estate. None of these things are true with regards a forex position.

Forex brokers like to use the words Buy and Sell when they allow us to take trades because it definitely feels like we are handling assets and it definitely does not feel like we are betting. Betting has negative connotations for many people for various reasons: buying and owning stuff does not.

Think of a long forex position in AUD/USD as like a bet that one horse in a series of races will win more often while another will lose more often in the same period. If you are right, and Horse A wins more than Horse B, you will make a profit. The owner of Horse A will also make a profit because the value of this winning horse is now higher than it was. meanwhile the owner of Horse B is losing money because the value of his horse is going down - why wouldn’t it, it keeps losing.

But when you put a bet on Horse A to win you did not buy a share of the horse. The horse still belongs 100% to the owner and he does not care or even know that you put your bet on. You both win money from the same circumstances, and because your profits are parallel to the owner’s profits, you can be called a buyer.

2 Likes
6

Sorry, this is a very complicated explanation for a simple fact, we are betting, not buying.

7

A fun explanation ! I’m into horse racing :sweat_smile: :racehorse: :racehorse: :racehorse: :racehorse:

8

CFD’s can take a little to get your head around. Once I started thinking about price movements in pips and pip value, it made a lot more sense.

9

Well, with my crypto exchange, I think I trade (buy & sell) the cryptos with other users in the exchange. I can transfer my crypto assets to my own local wallet. So I definitely own it, no?

With my stock broker, also I traded with the whole stock traders at my country’s central exchange. And after I bought some shares of a company, I usually get invitation to attend their shareholders meetings once or few times a year. And I also get dividends for each shares I own up to few times a year too.

So, my crypto exchage and my stock broker does not use the CFD system and I definitely own the shares / cryptos then, no?

I think tomorrow I plan to go thru the forex school here and see what I can learn. I have been busy today… probably tomorrow.

10

Yep - you can participate with your FX broker such as Oanda (BTCUSD) - works the same as any other cfd.

11

Well, I figured out… basically, you click buy on AUDUSD when you believe the price of AUDUSD will increase and vice versa. I believe it works the same on EURUSD. Also perhaps on others like USDCAD, but I haven’t confirmed this.

And most importantly also, is that you know how to close the ‘trade’ (‘close the position’)-- I believe what it’s more commonly called. Before last Wed 25th August 2021. I didn’t know how to close on an open position on MetaTrader. I thought, if I ‘bought’ 1 lot of AUDUSD, then to close the position, I would have to sell 1 lot of AUDUSD to ‘close’ it.

Well, how wrong it had been… I ended up just opening the same amounts of positions in the reverse direction / goals. And never taking the profits as I have intended LOLL. The predicted profits/losses still fluctuates as I have not closed any of my (wanted to-be-closed) open positions.

Basically to close an open position on MetaTrader, you have to long-tap an open position, then a dialog will show up with an option to close it. Or if you’re still confused, just search metatrader tutorial, there are plenty of youtube video tutorials.

–I think knowing how to close on a position is more important than knowing about whether it is a CFD or etc lol.

1 Like
12

Or maybe just right click the green broken line where your open position is - hey presto you can close with one click…

Another wee trick for closing via the chart - learn this one - left click your open position and you drag to where you want to close either in profit or indeed in loss - you can drag both ways (the close line will be in red and you can move it if you wish) - the magic of mt4 :slight_smile:

Edit: these are are just ways to close an open trade via the chart - later maybe learn some unique ways to open?

14

Forex trading is not traded on an exchange like previously mentioned on this thread. It is essentially trading on the exchange rate between two different currencies. Conceptually, if you are buying AUD/USD, you would be buying the first named currency pair in the quote currency pair. A trader who buys AUD believes that the Austrailian dollar will perform better than the American Dollar. On the other hand, if a trader sells AUD/USD then it is belived that the American dollar will outperform the Austrailian dollar.

If you would like a different example, you can take a look at the following link:
https://www.forex.com/en-us/education/education-themes/understanding-forex/forex-versus-stocks-how-do-these-two-trading-instruments-compare/

15

We are trading CFDs as in contract for differences we aren’t physically buying or selling that currency we are just trading it as in a contract just to profit of the difference in the price as seen in the name so you’re not really buying the currency to keep but to sell it back when it reaches a point go make a profit
It’s the same as exchanging your 1USD for AUD and then when AUD increases in price you now change it back to USD
But in CFDs you don’t need to really buy the pair it’s a contract you’re using

16

There’s a lesson here exactly about this question:

"New forex traders might be puzzled how it’s possible to trade currencies they don’t physically own. They’re also often confused about how it’s possible to sell something before buying it.

When you “ buy EUR/USD “, are euros actually transferred to your trading account?

Or when you “ sell GBP/USD “, how is this possible if you don’t have any British pounds in your possession?

You might think you’re buying and selling actual currencies, but you’re not.

You are not buying or selling anything tangible, you are simply speculating on currency exchange rates .

Speculation can be described as “ taking a view ” of the directional movement of a currency pair’s exchange rate."