Synthetic currency pairs are gaining popularity among seasoned forex traders looking for flexibility, arbitrage, and deeper market insights. In the ever-evolving forex market, where opportunities exist beyond standard currency combinations, synthetic currency pairs offer a smart way to trade less common crosses or access pairs not directly available through brokers.

A synthetic currency pair is constructed by combining two standard currency pairs to simulate a third pair. This process is based on the mathematical relationships between currency pairs and how exchange rates interact. For traders familiar with forex mathematics and execution, synthetic currency pairs can offer better spreads, hedge setups, and arbitrage opportunities.

For example, if your broker doesn’t offer EUR/JPY, you can create it synthetically by trading EUR/USD and USD/JPY. This not only mimics the EUR/JPY behavior but also provides extra flexibility in trading execution.

Understanding how synthetic currency pairs work is crucial for implementing a smart synthetic forex strategy. Let’s explore everything about them—from creation and application to real-world examples and risks.

How to Construct Synthetic Currency Pairs in Forex?

Constructing synthetic currency pairs starts with understanding the correlation between existing pairs. You use this relationship to form a synthetic equivalent of a cross-currency.

Take this example: you want to trade GBP/JPY, but your broker does not offer it. You can use GBP/USD and USD/JPY to simulate GBP/JPY.

Here’s the formula:

GBP/JPY = GBP/USD × USD/JPY

Let’s apply it using real prices:

• GBP/USD = 1.2700
• USD/JPY = 150.00
• Synthetic GBP/JPY = 1.2700 × 150.00 = 190.50

In this case, you can mirror GBP/JPY by buying GBP/USD and buying USD/JPY. Your resulting position will reflect the behavior of the actual GBP/JPY pair.

To trade these synthetic pairs effectively, you must understand how to trade synthetic forex pairs using these relationships and how different rates combine.

Benefits of Trading Synthetic Currency Pairs

Synthetic forex strategy has several advantages that traditional trading pairs may not provide. Below are some of the key benefits.

1. Access to Non-Standard Pairs

Sometimes brokers do not offer exotic or cross pairs like AUD/CHF or NZD/SGD. Synthetic pairs let you create and trade those indirectly.

2. Lower Spread Opportunities

Major currency pairs often have tighter spreads than crosses. Constructing synthetic currency pairs using major pairs can reduce trading costs.

3. Better Arbitrage Possibilities

If you find a price discrepancy between the synthetic price and the actual cross pair, you can exploit the difference using forex arbitrage techniques.

4. Custom Hedging Strategies

You can isolate a specific currency’s movement by constructing a synthetic that neutralizes one leg of exposure. This gives you more precise hedging control.

5. Portfolio Diversification

Synthetic forex strategy helps diversify your risk without overexposing your account to correlated currencies. This is especially useful when trading around macroeconomic events.

Currency Pair Correlation in Synthetic Trading

Currency pair correlation is essential when working with synthetic currency pairs. Positive and negative correlations determine how effective your synthetic pair will be in mimicking the desired behavior.

For example:

• EUR/USD and USD/CHF typically have a negative correlation.
• AUD/USD and NZD/USD often move together, showing positive correlation.

When constructing synthetic currency pairs, it’s important to ensure the pairs you’re combining maintain a consistent historical relationship. If correlation breaks down during high volatility, your synthetic might underperform.

Let’s say you’re trying to construct a synthetic EUR/CHF using EUR/USD and USD/CHF. This strategy only works well if the currency pair correlation remains reliable.

Check correlations regularly using platforms like Myfxbook, OANDA, or TradingView correlation matrices.

How to Trade Synthetic Forex Pairs in Practice

Trading synthetic pairs involves managing two or three trades instead of one. That means you’re dealing with more complexity and higher execution responsibility.

Here’s a step-by-step approach to how to trade synthetic forex pairs effectively:

Step 1: Choose a Target Cross Currency

Let’s say you want to trade EUR/GBP.

Step 2: Select Available Major Pairs

EUR/USD and GBP/USD can be used to simulate EUR/GBP.

Step 3: Calculate the Synthetic Price

EUR/GBP = EUR/USD ÷ GBP/USD
Suppose:

• EUR/USD = 1.1000
• GBP/USD = 1.2500
  Then:
• EUR/GBP = 1.1000 ÷ 1.2500 = 0.8800

Step 4: Execute the Legs

To go long EUR/GBP:

• Buy EUR/USD
• Sell GBP/USD

Step 5: Monitor Spread and Execution

Each leg has its own spread. Ensure the total cost doesn’t eat into potential profits. Slippage and latency can also hurt results.

Using Synthetic Forex Strategy for Arbitrage

Forex arbitrage techniques are more accessible through synthetic trading. Traders can monitor discrepancies between synthetic prices and actual cross-pair quotes.

If the real EUR/GBP is 0.8850 while your synthetic shows 0.8800, you could:

• Short actual EUR/GBP at 0.8850
• Long synthetic at 0.8800

When prices converge, you profit from the gap. This form of arbitrage is common in high-frequency trading environments where milliseconds count.

However, you don’t need to be a quant to benefit. Even retail traders can find occasional gaps during volatile sessions or around news events.

To apply forex arbitrage techniques safely:

• Use low-latency platforms
• Monitor execution speed
• Test correlation decay during risk-off scenarios

Managing Risks with Synthetic Currency Pairs

Synthetic currency pairs offer power, but they come with risks too. Here are the major ones to manage.

Execution Risk

You’re placing two or more trades. If one leg gets delayed or slips in price, your synthetic structure can become unbalanced.

Double Spreads

Every leg in the synthetic trade has a spread. You might pay twice or thrice the spread cost compared to a single pair.

Leverage Multiplication

Some brokers treat each leg of the synthetic trade separately in terms of margin. You must calculate exposure carefully.

Correlation Breakdown

Currency pair correlation is never perfect. During major economic shifts or crises, traditional correlations can break down, affecting synthetic efficiency.

Technical Complexity

Monitoring multiple trades, calculating synthetic prices in real-time, and adjusting to divergence requires skill. It’s not ideal for beginners.

Tools for Tracking Synthetic Currency Pairs

To manage synthetic trades effectively, traders often use tools like:

• Excel or Google Sheets: For real-time synthetic pair calculation using broker API data
• TradingView: Overlay two or more pairs to visualize synthetic behavior
• Python or R scripts: Automate synthetic pair monitoring and trigger alerts
• MT4/MT5 with Expert Advisors: Build custom scripts for auto-entry based on synthetic relationships

These tools help traders refine their synthetic forex strategy and track price parity efficiently.

Real-World Example of Synthetic Trading

Let’s take a 2024 example involving USD strength.

A trader is bearish on GBP/JPY but doesn’t want GBP exposure due to UK elections. Instead of trading GBP/JPY directly, they construct a synthetic short using:

• Short GBP/USD
• Short USD/JPY

This creates a proxy for GBP/JPY while avoiding direct exposure to Japan or UK volatility. When the dollar strengthened post-Fed rate hike, both legs profited, and the trader achieved the goal with less risk.

Such use of synthetic forex strategy shows how synthetic currency pairs can be used to shape risk and exposure more precisely.

When to Avoid Synthetic Currency Pairs?

Synthetic pairs are powerful, but not always appropriate.

Avoid them if:

• You’re new to forex
• Your broker charges high spreads or slippage
• Liquidity is low
• You’re trading during major news events
• You don’t have real-time tools to calculate synthetic prices

Sometimes the actual cross-pair is more cost-efficient and easier to manage.

Final Thoughts: Are Synthetic Currency Pairs Worth It?

Synthetic currency pairs offer serious potential for advanced traders who understand price relationships, pair correlation, and execution mechanics.

They allow:

• Access to rare pairs
• Arbitrage through forex arbitrage techniques
• Custom exposure
• Spread reduction using majors
• Hedging through clever pair combinations

However, synthetic trading requires precision. Without proper tools, calculations, or broker support, the strategy can become risky.

Traders serious about building an edge should study how to trade synthetic forex pairs and practice with demo accounts before risking real capital.

As the forex market grows more complex, strategies like synthetic forex trading will likely grow in importance for those looking to stay ahead.

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