To trade Synthetic pairs, Institutional forex traders are sometimes prevented from trading particular currency crosses due to a lack of available liquidity. This is because of the substantially greater trade amounts typical of institutional traders compared to retail FX trading.
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An institutional forex trader wants to buy GBP/JPY but can’t since there isn’t enough of either currency in circulation.
They would have to purchase the pound sterling US dollar and the dollar Japanese yen pairs in order to complete this deal.
They are able to pull this off due to the high volume of trades that may be placed in the GBP/USD and USD/JPY currency pairs.
It is possible to trade synthetic currency pairs as a retail forex trader if you want to give the impression that you are an institutional dealer. No two currencies ever pair together in the real world; this is the case with synthetic currency pairs.
However, that’s not a very smart move.
Now more than ever, you may utilise your forex broker’s trading platform to transact in previously inaccessible currency pairs, such as the British pound to the New Zealand dollar or the Swiss franc to the Japanese yen.
The spreads on the crosses that you trade would be less compared to the synthetic pair that you would construct. Moreover, the “menu” of available currency pairs would expand.
Also, don’t forget the value of margin use!
To generate a synthetic currency pair, you need to open two separate positions, each of which has its own margin needs.
It’s a waste of trading capital that might have been used for other purposes if you instead traded the cross-currency and avoided margin calls.
