Synthetic Indices are rising in popularity amongst traders the world over. However, there are still some misconceptions around them and in this post, we will explain what these synthetic indices are and why you may be interested in trading them.
The aim is to help you in understanding synthetic indices.
This a comprehensive guide. You can use the links below to jump to your preferred section. If you are new to forex you can check out this free introduction to forex trading course for beginners.
A popular question that many ask is the difference between these two; forex vs synthetic/volatility indices. Let’s look at the differences below:
1. Underlying Asset/ Cause Of Movement
Forex trading is based on the movement and relative strength of real currencies of different countries. Synthetic Indices are simulated markets that move through random numbers generated by a computer program.
Volatility (the speed of price change) in forex trading varies at different times due to a number of factors e.g there was high volatility in the markets recently due to the American presidential elections. This makes forex tricky to trade at other times and you have to find the best time to trade.
Synthetic indices, on the other hand, have got constant (uniform) volatility all year round. Thus, there is no best time to trade synthetic indices since their rate of movement is the same all year round.
3. Availability/ Trading Times
Forex currency markets are open 24/5 from Monday to Friday when the world’s financial centres are open. The markets are closed on weekends and also during holidays like Christmas.
Synthetic Indices are available 24/7/365. You can trade them anytime, any day with uniform volatility.
4. Brokers Offering The Trading Instruments
There are a lot of brokers that offer forex trading services in the world. As a trader, you get to choose a particular broker that fits your circumstances.
When it comes to trading Synthetic/Volatility Indices you only have one broker offering them. That broker is Deriv and it offers both Forex and Synthetic Indices trading. So by using the broker you get to shoot two birds with one stone.
5. Number Of Tradable Assets
Depending on the broker, there may be as many as 90+ forex pairs to trade. On Deriv, for example, there are 50+ forex trading assets.
When it comes to Synthetic Indices, there are only 10+ assets broken down into Volatility Indices, Crash Boom Indices, the Step Index and Range Break Indices.
6. Trade Volume
As of 2019, the forex market has a daily volume of US$6.6 trillion. Synthetic indices, on the other hand, have a far less daily trade volume.
Forex can be traded on MT4 and MT5 depending on the broker. Synthetic indices, on the other hand, are only traded on MT5 synthetic indices account from Deriv.