Institutional forex traders may be unable to trade certain currency crosses because they trade in such high volumes that there is insufficient liquidity to execute their transaction.
They must first establish a “synthetic pair” in order to execute their intended deal.
How to Create a Synthetic Currency Pair
Assume an institutional forex trader wishes to purchase GBP/JPY but is unable to do so due to a lack of liquidity.
To carry out this deal, they would need to purchase both GBP/USD and USD/JPY (earlier in this lesson, we learned that these pairs are called its legs).
They are able to do so because there is considerable liquidity in the GBP/USD and USD/JPY pairs, allowing them to place huge orders.
If you are a retail forex trader and want to trade like an institutional trader, you may technically trade synthetic currency pairings as well.
But it wouldn’t be very wise.
Since Al Gore “created” the internet, technology has advanced to the point where even unusual currency crosses, such as GBP/NZD or CHF/JPY, can now be traded on your forex broker’s platform.
To create a synthetic currency pair, you must initiate two separate trades, 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 lingo for one BILLION units), avoid synthetic currency pairs and instead focus on currency crosses.
Next Lesson: Trading the Euro and Yen Crosses