Synthetic Spread Trading On Nadex: Going Long (Part 1)

In the Introduction to this series, it was explained how sometimes a different Forex pair is needed in your trading. This is an advanced topic and should be treated as such. As a quick review, the article reminded you of your algebra skills learned where:

a x b = a
b    c    c

Then, adding in the needed instruments gave us the following:

EUR X USD = EUR
USD    CAD    CAD

To read the the whole article, please click HERE.

Looking at this on paper, it may make perfect sense, or it may not, but don’t forget a simple step. There’s a multiplication process in this problem. Lets put some numbers in there to make this work.Let’s say the EUR/USD is trading at 1.2512 and the USD/CAD is trading at 1.1242. When you multiply those two together, the product is 1.40659904 which is the price of the EUR/CAD. Once you have created your synthetic pair with these Nadex instruments, you can begin to set up your trades. You would use it in your trading strategies similarly as you would any of your other instruments, except you would be trading a minimum of two standard (EUR/USD and USD/CAD) currency pairs.

For this example, we will continue to use the synthetic pair EUR/CAD that we formed above. To utilize this trading strategy in a long position, and in effect, cancel out the USD, you have to buy both contracts. Hang on to your brain, here. This gets complicated and may need a second or third reading! By buying the EUR/USD, you are long the EUR and short the USD. Then when you buy the USD/CAD, you are long the USD, which cancels the first USD, and short the CAD, leaving you long the EUR and short the CAD, accomplishing what you set out to do.

What happens if the two currencies you want to trade are on the same side? In the algebra equation, you can’t cancel out on the same side when multiplying, so you have to divide. Don’t worry about the rules you may have learned in school and don’t think of these instruments as fractions, just know that if the currency you want is on the same side, you must divide. To illustrate this synthetic pair, lets take USD/CAD and USD/CHF to form CAD/CHF.

USD / USD
CAD   CHF = CAD/CHF

Notice that both USDs appear on top or on the same side, making it necessary to divide instead of multiply. If the USD/CAD is trading at 1.1259 and the USD/CHF is trading at 0.9675, you would divide the USD/CAD by the USD/CHF for a quotient of 1.163721. If you want to go long on this synthetic pair, you would sell the USD/CAD and buy the USD/CHF. This is even more complicated than the first example above, but still understandable. When you sell the USD/CAD, you are short the USD and long the CAD. When you buy the USD/CHF, you are long the USD, thus cancelling out your other USD trade and short the CHF, leaving you long the CAD and short the CHF, which is what will give you your long CAD/CHF position.

Let’s look at one more example. Let’s create the exotic pair GBP/CHF from GBP/USD and USD/CHF. The first thing you should notice is that the USD is on opposite sides so that means you will need to multiply in order to cancel out the USD. Here’s your formula:

GBP  x   USD  =  GBP
USD       CHF     CHF
In order to go long on the GBP/CHF, you would need to buy both contracts as doing so would cancel out the short and long USD leaving you with a long GBP and a short CHF.

This is definitely an advanced strategy but worth your attention, if you are ready to learn it. If you would like to view a video about this synthetic spread trading, click HERE.

If you’d like to learn other trading techniques, go to www.apexinvesting.com. Apex Investing Institute offers free education, and free access to the Nadex Binary and Spread Scanner Analyzers. Member traders are invited to trade in the chat rooms, take advantage of trade signal services, have key indicators and access the Apex Forum. The forum content is updated daily and includes over 8000 members. In a supportive learning community of seasoned as well as up and coming traders, traders of all levels learn how to trade Nadex binaries and spreads in depth, as well as futures, Forex, stock and options, and gain an edge for successful trading overall.