So lets start from the beginning:
Heres what we know:
- Currency can only be valued when compared to another currency. So
each time you enter a position on a currency it is always relative to
another currency. So the currency pair can actually be thought of as one unit.
- The first currency of a currency pair is called the "base currency",
and the second currency is called the "quote currency".
- If you buy a currency pair, you buy the base currency and sell the quote currency.
See - Currency Pair - Investopedia
So now lets begin braking your question down:
If I take a position on USDCAD, what I think is that I take some of my USD in my account and purchase an amount of CAD
(I assume you mean "long position")
No, if you execute a buy(long position) on USD/CAD this means you are buying the USD vs the CAD(your betting the USD will go higher vs the CAD). Remember the USD is the base currency and the CAD is the quote currency. So in this case you would actually be borrowing CAD and purchasing more USD.
What your looking for would be to execute a sell(short position) on USD/CAD - this means you are using USD to buy CAD(betting CAD will go higher vs the USD).
Now if I switch the base currency and the quote currency (e.g: CAD/USD). Then going long CAD/USD would be the same thing as going short USD/CAD, that's because in every currency trade you are always going both long one currency and short another. This leads us back to the first rule from the beginning.
Hopefully that made sense.
Onward to AUD/JPY, CHARGEEE!
You are correct in saying:
so such a position will cause a long purchase of AUD and a short sell of JPY
But your analysis on USD/CAD is still incorrect for the same reasons as before.
Ok gents we're almost home!
So trying to simplify, I feel that I have bought CAD and AUD with my
USD and short sold some JPY for USD. Am I correct in this thinking?
No you did not buy AUD with USD, at least not directly(key word). When going long AUD/JPY, you are borrowing JPY then using JPY to buy AUD. So now to exit this trade you would go short AUD/JPY which means your using the AUD to buy back the JPY after which you would give back the JPY you borrowed. Any extra JPY would be your profit (or loss if the trade went the other way).
But there's more: We also have to understand that our native currency is USD, meaning when we go to a store, no one cares about JPY they only want to see USD. So at the end of the day everything must calculate to its USD equivalent. Your brokerage firm also will not accept your maintenance-requirement or your fees in any other currency but your native one.
So for example:
If you made 100 JPY profit from your trade, how much profit did you make? hint: It's not 100 JPY.
Yes you may have added 100JPY but that means absolutely nothing to us, because all we care about is USD! So the right answer is we made "whatever 100JPY = in USD at the time we convert it".
Your brokerage firm will take care of all the day to day calculations for you in real time so you don't have to sit there contemplating how much your profit really is or what your maintenance-requirement is. To put it simply every trade you make must always come back to your native currency and hence why you are indirectly buying AUD with USD because the real value of the amount you make is dependent on the JPY vs the USD, simply because the USD is what you pay your bills with. So EVERYTHING has to come back to USD.
See the section called - Converting Profits and Losses in Pips to Native Currency
WOOHOO We made it!
So lets keep reading:
Taking a look at the answer to - WSJ article about CFDs - am I missing something? will help as it explains a-lot of what you asked.
Baby Pips - is a good site for Forex explanations.
Specificlly this article gives a good explanation about what your asking.