How to Create a Synthetic Currency
Pair
Let’s say that an institutional
forex trader wants to buy GBP/JPY but can’t because there isn’t enough
liquidity. To execute this trade, they would have to buy both GBP/USD and
USD/JPY (earlier in this lesson, we learned that these pairs are called its
legs).
They are able to do this because
there is plenty of liquidity in GBP/USD and USD/JPY which means they can make
large orders.
If you’re a retail forex trader,
and you wanted to pretend to trade like an institutional trader, then you could
technically trade synthetic currency pairs as well. But it wouldn’t be too
smart.
Ever since the great Al Gore
“invented the internet,” technology has improved to the point now that even
weird currency crosses like GBP/NZD or CHF/JPY can now be traded on your forex
broker’s platform. Aside from having access to a larger “menu” of currency
pairs to trade, the spreads would be tighter on the crosses compared to the
synthetic pair you’d create.
And let’s not forgot about margin
use! Creating a synthetic currency pair requires you to open two
separate
positions and each position requires its own margin. This locks up unnecessary
capital in your trading account when you can simply trade the cross-currency
and save on margin.
So unless you’re trading yards
(forex slang term for one BILLION units), forget synthetic currency pairs and
stick to currency crosses. You will be savings yourself some pips (thanks to a
tighter spread) as well as freeing up your capital so you can take on more
trades.
