Why You Shouldn't Trade a Synthetic Currency Pair

Institutional forex traders are often unable to trade certain currency crosses because they trade in such high volumes that there is insufficient liquidity to fulfil their orders.

They must first establish a “synthetic pair” in order to execute their intended deal.

How to Make a Currency Pair That Isn't Real

Let's imagine an institutional forex trader wants to buy GBP/JPY but is unable to do so due to a lack of liquidity.

They'd have to buy both the GBP/USD and the USD/JPY pairs to execute this trade (we learned about both pairs previously in this session).

They are able to do so because GBP/USD and USD/JPY have considerable of liquidity, allowing them to place huge orders.

You could technically trade synthetic currency pairs if you're a retail forex trader who wants to pretend to trade like an institutional trader.

But it wouldn't be very wise.

Even strange currency crosses like GBP/NZD or CHF/JPY can now be traded on your forex broker's platform, thanks to advances in technology since Al Gore “created the internet.”

In addition to having a bigger “menu” of currency pairs to trade, the spreads on the crosses would be tighter than the synthetic pair you'd build.

Not to mention the use of margins!

To create a synthetic currency pair, you must first establish two distinct positions, each with its own margin.

When you can simply trade the cross-currency and save on margin, this locks up needless funds in your trading account.

So, unless you're trading yards (forex slang for a billion units), stick to currency crosses instead of synthetic currency pairs.

You will save pips (because to a tighter spread) as well as capital, allowing you to take on more deals.