Institutional forex traders will sometimes find it challenging to trade in particular currency crosses because of the size of their trades. Their trades are too large for the current market to handle them, and that is why they will trade in so-called synthetic currency pairs instead.
How a Synthetic Currency Pair is Made
It is possible that an institutional Forex trader may find themselves eager to try to trade in a cross currency, but they can’t do so because their trade size is too large. For example, if they wanted to make an oversized trade in the AUDJPY cross, they might actually make large buys in both the AUDUSD and USDJPY since there is plenty of liquidity in both of those.
Here’s what that would look like…
- You want to buy AUDJPY.
- You buy AUDUSD — essentially buying AUD and selling USD.
- You buy USDJPY — essentially buying USD and selling JPY.
- The bought and sold USD cancel out.
- You’ve just bought AUD — and sold JPY.
Technically, you could try to pull the same move for yourself as a retail trader, but it is best to steer clear of this one.
The reason being is because most cross currency pairs (even the obscure ones) can be traded directly on your broker’s platform. There is no real reason for you to search for a way to create a synthetic currency pair when you can just trade the cross that already exists. As a retail trader, the size of your trade is not going to be enough to truly push the market around, so you really have nothing to worry about in terms of getting your trade in just the way that you want it.
Let your trade rip off into the cross currency pairs in the most straightforward way possible and you should have no problem getting the trade in on time and making sure it is in the size and currencies that you desire. Getting too complicated with synthetic trading is only likely to lead to confusion and frustration and is best to be avoided.