Synthetic Pairs

You've done your analysis and you've come to the conclusion that the British Pound looks strong and the Swiss Franc may get weaker.

Or maybe the Australian dollar is looking pretty good against the Canadian dollar, but you look in your trading platform and see that your broker doesn't have GBPCHF or AUDCAD.

Oh no! I guess that's an opportunity missed, right? Heck No! You can create a "synthetic" pair to go long on GBPCHF or AUDCAD.

To create synthetic pairs using the four major currency pairs and three commodity currencies is relatively easy. All it takes is to buy or sell two pairs with equal position sizes.

Let's say you want to go long the British Pound against the Swiss Franc, or buy GBPCHF.

You would have to buy GBPUSD and buy USDCHF at the same time. Still not clear? Let me show you...

Pretty simple, right? The only trick to it is making sure you buy the same amount of each pair.

Using our GBPCHF example, let's say the current exchange rate for GBPUSD is 1.9000 and the exchange rate for USDCHF is 1.2500 and you want to buy US$10,000 worth of each pair. Here's how you do it:

For pairs with USD as the counter currency (i.e. AUDUSD, GBPUSD, EURUSD, etc.), then you would take the dollar amount you want to purchase and divide it by the exchange rate:

US$10,000 (desired position size) divided by 1.9000 (current rate of GBPUSD) = 5263 Units of GBPUSD

For pairs with USD as the base currency (i.e. USDCHF, USDJPY, USDCAD), just purchase amount of units you want to buy because you are buying US dollars

$10,000 (desired position size) * 1 Unit = 10,000 Units

So, to buy US$10,000 worth of GBPCHF, we purchase 5,263 units of GBPUSD (if your broker doesn't offer flexible lot sizes you can always round up or down) and 10,000 units of USDCHF. Got it? Great! I knew you would!