Tuesday, 24 April 2018
Should You Trade Synthetic Currency Pairs?
No, we are NOT talking about drugs and this article has nothing to do with the 70’s. A synthetic cross currency pair refers to an artificial combination of currencies usually not available in the market.
If you are taking your first steps in the Forex market, then you are probably not going to invest huge money on it. And that is just fine, but keep in mind that starting out with a small balance could also limit your access to a wide range of trading instrument.
Nothing to worry about. Nowadays, Forex brokers offer a wide range of trading instruments, even for basic accounts. Newbies should try different pairs and find their prefered ones to work with.
The popularity of synthetic currency pairs is going down day by day. As brokers fight to survive in a competitive environment, their offers become more expansive. Not only EURUSD, GBPUSD and USDJPY are seen on screens, but also currency crosses like EURJPY or EURCAD.
Most traded currencies: US dollar (USD), Canadian dollar (CAD), euro (EUR), British pound (GBP), Swiss franc (CHF), New Zealand dollar (NZD), Australian dollar (AUD) and Japanese yen (JPY).
Cross currency pairs that come out them: USD/CAD, EUR/JPY, EUR/USD, EUR/CHF, USD/CHF, EUR/GBP, GBP/USD, AUD/CAD, NZD/USD, GBP/CHF, AUD/USD, GBP/JPY, USD/JPY, CHF/JPY, EUR/CAD, AUD/JPY, EUR/AUD, AUD/NZD.
DO you think these are enough? Well, for most of us they are, but still there cases where traders need artificial combinations that a broker will not include in its preset offering.
A synthetic currency pair should actually be seen as two currency pairs, with the US dollar taking the role of intermediary currency in operations.
Example: you want to trade EURJPY and the pair is not offered by your broker as a cross currency pair. What do you do? You have to find a common connection between both. Right, the dollar.
EURJPY: EURUSD + USDJPY
Buy EURJPY: Buy EUR Sell USD + Buy USD Sell JPY
Sell EURJPY: Sell EUR Buy USD + Sell USD Buy JPY
Operating a synthetic currency pair requires you to open two separate positions, which means doble cost for you plus the need to lock up unnecessary capital for margin requirements.
Recommendation: unless you are going BIG, then better stay safe using currency crosses and leave synthetics for financial institutions trading large volumes.
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