Synthetic Pairs continued...

...better late than never. So, say we wanted to trade the Euro, but lately the overall trend has been questionable or the pair is rangebound. Both short & long ideas seem to look equally probable. We could set a long/short 'bracket' & wait for a breakout either way. Sometimes, under these conditions many false breakouts occur. Worst case, it could even trigger both trades, only to have each fail. As price heads towards either break trigger, it must travel towards the outer limits of the range & since there's indecision this causes price to stall and reverse.

Now, normally, if we tightened our entry down we could increase our chance of profitability, but when we do this, we are also decreasing our probability, as they are generally a trade off. This is where the synthetic pair can come in.

What if we were to place a long entry on the EURUSD closer and slightly above where current price lies, allowing us to profit from a moderate move upward. Then, similarly, we place a short entry order on the EURJPY which triggers on a retrace (so both positions enter apx same time) with a similar risk/reward ratio. Theoretically, we're hedging out our Euro risk and what we're left with is a position which is short USD & long JPY. It's almost as if we (I'm in the US) just traveled to Europe & started trading the USDJPY there, with Euros. That's what's really cool about FX trading.

Now, I picked the long/short directional bias assuming that when the USDJPY chart is analyzed this is what it dictates. Of course, if this same chart showed a bearish directional bias, we would do the opposite (short EURUSD, long EURJPY).

Essentially we're trying to profit more from the volatility of the market, rather than directionality. Target's are kept realistic, allowing them high chance of being hit, and stops are loose enough allowing the trade sufficient room to 'breathe.'

Now, by no means does this guarantee success, nothing can in the markets in regards to individual trades. It's completely possibly for both positions to fail using this approach as well. The key is utilizing this when the time is right. A strong trending market is likely to put pressure on both the dollar and the yen since they're both associated with risk aversion.

Hope this is clear, and I welcome any corrections/comments/complaints, etc... !