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How to Trade Synthetic Crosses

A synthetic pair is a combination of two currency pairs that are combined in such a way that the trader's positions on the third currency mutual to both pairs – almost always the U.S. dollar – cancel each other out.  That way, the trader effectively makes himself a currency pair of whatever two currencies he would like. 

The trader accomplishes this by going long on one currency and short on the other.  For example, let's say a trader would like to synthesize a Canadian dollar/Japanese yen pair – CAD/JPY.  He or she would go short on, say, $10,000 worth of the loonie, and go long another $10,000 on the Japanese yen. 

It's difficult to find graphing services for synthetic pairs.  Google and Yahoo both offer services that are adequate, but neither really goes all out with extensively customizable charting options.  That being said, they work well enough, and should be enough for you to track your synthetic pairs. 

When one half of your synthetic pair comes from a currency pair that is usually listed with the USD last, make sure you convert the pair appropriately. 

For instance, if you were making a currency pair with the euro, you would take the current value of the EUR/USD and divide your desired dollar amount by that number.  So, if you were purchasing $100,000 worth of one currency and $100,000 of the EUR/USD, and the current value of the euro was a painfully high $1.58, you would want to purchase $100,000/1.58 worth of euros, or $63,291. 

Synthetic pairs are more work, but they open up a considerable number of new options for the trader.  They are not genuine currency pairs, but they protect the trader from variations in the third pair just enough that they behave like something close to an actual currency pair. 

Synthetic pairs are also more difficult to get right, as the trader needs to be right about both of the currencies.  However, when a trader is indeed right on both fronts, he or she will generally make a considerable profit.