Synthetic Indices are rising in popularity amongst traders the world over. However, there are still some misconceptions about 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.
What are Synthetic Indices?
Synthetic indices are simulated trading instruments that mimic or reflect the behaviour of real financial markets.
Since they are simulated markets, you may be wondering:
What moves synthetic indices?
Synthetic indices move through the use of randomly generated numbers.
The random numbers are generated by a cryptographically secure computer programme & for transparency issues, the broker is unable to influence or predict which numbers will be generated. This is just like in the real-world financial markets where the broker has no influence on the price movements.
The random number generator that moves the volatility indices charts is audited for fairness by an independent third party to ensure fairness.
Which Broker Offers Synthetic/ Volatility Indices?
At the moment, there is only one synthetic indices broker that provides these trading instruments on different trading platforms.
That broker is Deriv.com (formerly known as Binary.com). Deriv is a pioneer and market leader in trading with over 20 years of experience and multiple awards. The broker also has more than one million satisfied customers.
You can open your account on Deriv by clicking here.
You can trade these synthetic indices on various platforms on Deriv.com. These platforms include DMT5 (Deriv MT5 platform), binary options, Smart Trader, DTrader and the D-bot (which is the Deriv bot that you can tweak according to your trading strategy).
What Are The Different Types of Synthetic Indices offered by Deriv.com?
There are five types of Synthetic Indices available on the Metatrader 5 (MT5) trading platform.
These are examples of synthetic indices:
- Volatility Indices
- Crash & Boom Indices
- The Step Index and
- Range Break Indices.
- Jump Indices
Synthetic indices can also be further divided into two broad types i.e, daily reset indices and continuous indices.
Continuous Indicies on Deriv.com
Continuous Indices on Deriv.com move non-stop. They are ongoing 24/7/365.
Daily Reset Indices on Deriv.com
Daily Reset Indices are slightly different, they replicate markets with a bullish and bearish trend respectively with constant volatility. There are only two daily reset indices; The Bull Market and Bear Market indices which reset (or restart) at 0:00 GMT daily.
What Are Volatility Indices On Deriv.com
Volatility Indices on Deriv.com are a type of synthetic indices which are simulated markets that mimic the real world market volatility. Deriv.com offers various volatility indices namely;
- Volatility 10 Index (V10 Index)
- Volatility 25 Index (V25 Index)
- Volatility 50 Index (V50 Index)
- Volatility 75 Index (V75 Index) This is the most popular volatility index
- Volatility 100 Index (V100 Index)
What do the numbers on Deriv's Volatility Indices mean?
These numbers indicate volatility of the index relative to the real-world market volatility. Market volatility is measured on a scale from 1 to 100 with 100 being maximum volatility.
Thus, the Volatility 100 Index represents 100% market volatility and the Volatility 10 Index has only 10% of the real-world market volatility. In other words, the Volatility 10 Index has just 10% of the volatility of the V100 Index.
Volatility 50 has 50% of the volatility of the V100 Index and so on.
These indices update at the rate of one tick every two seconds. A tick is the minimum price movement of an index.
1 Second Volatility Indices (1s)
There is another group of indices that update faster with a tick every second and they are called the 1(s) indices. These indices are just like the above-mentioned indices and you can see them listed below;
- Volatility 10 Index (1s)
- Volatility 25 Index (1s)
- Volatility 50 Index (1s)
- Volatility 75 Index (1s)
- Volatility 100 Index (1s)
These volatility indices can be used in binary options trading as well but we will focus on how to trade them in the same manner we trade forex.
How To Open a Synthetic Indices Trading Account On Deriv.com Step By Step
Open A Deriv.com Account
First, you need to open an account by clicking here
Enter your email and click where it says ‘Create Demo Account'
Confirm your email by opening it and clicking the link sent by Deriv. If you don't find the email check your Junk/Spam folder. The email looks like the one below.
Complete the signing up by entering your preferred password and country of residence.
2. Open A Real Trading Account On Deriv.com
By default, you will first create a demo account with virtual funds of $10 000 when you sign up. This demo account is meant to help you get used to the platform and try out strategies etc.
To trade real money you will need to open a ‘real' account.
To open the real account you will need to login to the demo account you created in the step above. After logging in you will see the screen below:
Begin by clicking on the dropdown menu beside the $10 000 virtual money balance.
The first option under the Real tab will be the option to add a real Deriv account. Click on the add button. The following screen will appear:
You will need to choose your preferred account currency. This is the currency that you will use to trade, deposit and withdraw. Make sure you choose the best currency as you will not be able to change this after you have made a deposit.
You can also create another account with another currency by clicking on the button that says ‘Add or manage account'.
On the next few pages add your correct details including name, address and phone number. You will need to use details that you can later verify. This is because as part of its Know Your Customer (KYC) policy, Deriv will ask you to upload your proof of residence and ID or passport.
These documents ought to have the same details you will supply during the registration.
3. Open A DMT5 Synthetic Indices Trading Account
The real account you have just created can be used to trade binary options on Deriv.com but it cannot be used to trade on DMT5. To trade synthetic indices on MT5 you will need to open a dedicated mt5 synthetic indices account.
Now when you click on the Real account tab you be able to create up to three DMT5 accounts. These are different accounts which give you the ability to trade different instruments.
For now, we are interested in the mt5 synthetic indices account so click the ‘Add' button next to that account type.
The first step will ask you to choose a password for the DMT5 synthetic indices account. This is the password that you will use to login to your Metatrader 5 account.
After creating the account you will now see the account listed with your login ID. You will also get an email with your login ID that you will use to login to the mt5 synthetic indices account.
After creating your account you will be prompted to transfer funds from your main account to your DMT5.
4. Download the MT 5 platform
You will then need to download the MT 5 platform. To do this you must click on the synthetic account as shown in the pic below.
You will then be taken to a page with links to Metatrader 5 application for various systems like Android, Windows, iOS etc at the bottom of the page. Download the one you want to use.
5. Log in to your MT 5 account
After downloading and installing your DMT5 you will then need to login to your trading account. Click on Settings> Log in to new account.
You will need to enter the following:
Broker: Deriv Limited
Make sure you type these correctly because if you make mistakes you will not be able to connect to your trading account.
After you log in, you will see a screen below.
What Are The Advantages Of Trading Synthetic Indices On Deriv.com?
You may be wondering why you need to bother yourself by trading these synthetic indices like Forex when you can simply trade the real thing i.e currency pairs. The following reasons, in our view, make trading synthetics attractive.
Synthetic Indices are not affected by fundamentals.
Volatility indices mimic (or copy) the behaviour of the financial markets but since they are not like currencies, they are not affected by fundamentals like interest rate hike announcements.
If you have been trading forex long enough you will know that fundamentals can drive the market crazy.
As we write this, there was an interest rate hike by the Bank of Canada (BOC) Just yesterday and the CAD pairs had some crazy volatility.
Such movements are quite rare when trading synthetic indices (except when trading Boom and Crash & Range break indices) & this is a major advantage.
2. Synthetic Indices have uniform volatility
This is partly linked to the point above. Synthetic Indices are different from forex pairs which tend to have varying levels of volatility depending on factors such as time of day, time of the week, impactful news (like the NFP announcement), natural disasters etc.
To illustrate, during the initial days of the Coronavirus induced worldwide lockdown the forex market was quite sluggish with minimal volatility.
This made it difficult to find good trading opportunities. On the other hand, synthetic indices were not affected in any way.
3. You can Trade Synthetic Indices 24/7/365
Synthetic Indices are not only open during working hours like Forex. They available all year round including weekends and holidays. This makes them very convenient.
3. Synthetic Indices have very low spreads & High Leverage
Spreads are a major cost in forex trading. It gets even trickier when you consider the fact that different brokers have different spreads.
This means that if you choose a broker with high spreads then your trading costs will shoot up.
Synthetic indices have very low spreads getting as low as 1 pip in some instances.
4. Volatility Indices can be traded with Price action
This is the best of all these advantages for us. We believe price action simplifies the trading process. Let us show you examples of price action at play in volatility indices markets.
These few examples show that you can successfully trade volatility indices using price action.
5. You can trade Cryptocurrencies on Deriv.com's MT5
This is a bit unrelated to synthetic indices. However, cryptocurrency trading is fast gaining popularity and its something that we are interested in. In fact, we will be sharing crypto signals in the very near future.
So one MT 5 account will allow you to trade synthetics, forex and cryptocurrencies. This makes it very convenient.
The table below shows the cryptos you can trade.
6. There is no Minimum Deposit Needed To Trade Synthetic Indices On MT5
To deposit to you DMT5 you need to first make a deposit to your main account using the various deposit methods. You will then need to move your funds from your main account to your DMT5 account via the cashier option.
The good thing is that you can transfer as much or as little as you want to your MT5 account.
This makes it convenient for you as a trader as you can decide to trade with as much or as little as you want.
In other words, you can start with low trading capital.
7. You can Demo Trade Synthetic Indices
This is an advantage because you can get to know about the volatility indices and how to trade them without risking your money. You can test out various strategies risk-free.
- Synthetic indices are generated randomly and also audited for fairness by an independent source.
- When trading synthetic indices on DTrader, you’ll know your exact risk at the outset, so no nasty surprises or margin calls.
- Synthetic indices are ideal for small and large traders alike with deep liquidity and fast order execution at any time of day or night.
- Trading synthetic indices can be regarded as training for understanding real markets, as a first step before graduating to trading more complex instruments like forex and stock indices.
- New synthetic indices are to be offered as Deriv heavily invests in research and development.
- You have the ability to choose a range of synthetic markets with lower or higher risk-reward characteristics.
- They’re ideal for automated trading with continuous quotes and no gaps.
- There are no negative balances.
- They’re not subject to manipulation or fixing.
Disadvantages of Trading Synthetic Indices
There are a few disadvantages of trading synthetic indices from Deriv.com that you must be aware of before trading.
1. Not all volatility Indices can be traded using 0.01 lot size
That is not the case with volatilities. The table below shows the various synthetic indices and their smallest lot sizes.
Smallest lot size
|Volatility 10 Index||0.3|
|Volatility 25 Index||0.50|
|Volatility 50 Index||3|
|Volatility 75 Index||0.001|
|Volatility 100 Index||0.2|
|Volatility 10 (1s) Index||0.5|
|Volatility 25 (1s) Index||0.50|
|Volatility 50 (1s) Index||0.005|
|Volatility 75 (1s) Index||0.005|
|Volatility 100 (1s) Index||0.1|
|Boom 1000 Index||0.2|
|Boom 500 Index||0.2|
|Crash 500 Index||0.2|
You have to be extra cautious when you trade to ensure that you use the correct lot sizes. For example, if you use 0.50 on Volatility 75 then you will open a very big position. If you use that lot size for, say HF 50, the position will not be so big.
Be very wary of this, you can easily get into trouble and wipe out your account before you know it.
2. There are very few Volatility Indices to choose from
Having fewer volatility indices to look at as compared to forex pairs can be both an advantage and a disadvantage.
It can be an advantage in that it makes it easy to track them. On the other hand, it may mean that at times there will be no tradable setups on any of the indices.
3. Volatility Indices are very Volatile
This may seem obvious but it needs to be stressed. What this means is that the market moves very fast in a short period of time.
Your account can easily be wiped out if you use the wrong lot size and you don't notice it.
4. Some Synthetic Indices have very large stop-loss levels
Volatility 50 has a stop-loss level of 40 000 points or about US$11 using the smallest lot size of 3. This can be a challenge if you want to scalp and have tight stop losses. V 100 also has a large stop-loss level.
One way of combating this is to only leave the fund you want to expose to the market in you synthetic indices mt5 account and move the rest to the main account. For example, if you want to have your stop-loss level at the US$5 level you can choose to leave only U$$5 in the MetaTrader 5 synthetic indices account.
If the trade goes against you the US$5 is the only money you will lose.
5. Sometimes' the past market data of Volatility Indices disappears after Server Maintenance
The MT 5 servers that run these volatility indices are regularly maintained. At times when they get back up the historical data may not be available. This makes it hard to identify useful information like areas of support and resistance.
6. There is a Risk of Overtrading
There is a strong risk of overtrading since synthetic indices are available 24/7. Without proper discipline, you may be tempted to trade every time you open your DMT5
Where Can You Trade Synthetic Indices?
You can trade these synthetic indices on various platforms on Deriv.com.
These platforms include DMT5 (Deriv MT5 platform), binary options, Smart Trader, DTrader and the D-bot (which is the Deriv bot that you can tweak according to your trading strategy).
Trading Synthetic Indices on DTrader On Deriv
The DTrader be accessed via Deriv.app on a desktop or a mobile device on a browser.
DTrader allows you to trade directly from the live chart. Deriv provides a continuous price feed for trading Rise (UP) or Fall (Down) as well as other ways to trade a synthetic index.
When you trade synthetic indices on DTrader, there are many digital option trades that you can choose from, and Deriv is always adding more. Below are the current options.
Rise/Fall Options on DTrader
Predict whether the exit spot will be strictly higher or lower than the entry spot at the end of the contract period.
Higher/Lower Options on DTrader
Predict whether the exit spot will be higher or lower than a price target (the barrier) at the end of the contract period.
Matches/Differs Options on DTrader
Predict what number will be the last digit of the last tick of a contract. The duration of this trade cannot exceed 10 ticks.
Over/Under Options on DTrader
Predict whether the last digit of the last tick of a contract will be higher or lower than a specific number. The duration of this trade cannot exceed 10 ticks.
Even/Odd Options on DTrader
Predict whether the last digit of the last tick of a contract will be an even number or an odd number. The duration of this trade cannot exceed 10 ticks.
Touch/No Touch Options on DTrader
Predict whether the market will touch or not touch a target at any time during the contract period.
How To Trade Synthetic Indices on Deriv MT5 (DMT5)
MetaTrader 5 (MT5), developed by MetaQuotes Software, gives Deriv clients access to multiple asset classes — forex, stocks, commodities, and indices — on a single platform. MT5 can be used on Android or iOS mobile devices as well as desktop PC or MAC.
On DMT5 you can do margin trading and CFDs.
Margin trading allows you to make an investment using leverage. Deriv offers up to 1:1000 leverage. This allows you to control a large position than your balance. Leverage magnifies your gains; but it will also magnify your losses.
Contracts for difference (CFDs)
A contract for difference is a contract that gives you the chance to earn a payout by correctly predicting the price movement of assets without owning them.
On DMT5 CFDs give you exposure to a market and allow you to go long (trade for price to go up) or short (trade for price to go down).
What is the Difference Synthetic Indices & Forex?
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.
Frequently Asked Questions on Synthetic Indices
What is the best time to trade synthetic indices?
Can you trade synthetic/ Volatility indices on MT4?
How many synthetic indices brokers are there?
Conclusive Remarks on Trading Synthetic Indices
Synthetic indices offer a different trading experience that can be profitable. Their increasing popularity the world over is a testament of this.
We would suggest you take your time and practice these markets on a demo account before risking your money.
Volatility Indices from Deriv.com have a maximum leverage of 1:1000 and this can be a double-edged sword. It can prop up and amplify your profits as well as your losses.
Click the button link here to get started.
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Are you interested in trading synthetic indices from Deriv.com? Do you need further help? Leave your thoughts in the comment box below and we will definitely get back to you. If you are new to forex you can check out this free INTRODUCTION TO FOREX TRADING FOR BEGINNERS COURSE.
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The products offered on the deriv.com website include binary options, contracts for difference (“CFDs”) and other complex derivatives. Trading binary options may not be suitable for everyone. Trading CFDs carries a high level of risk since leverage can work both to your advantage and disadvantage. As a result, the products offered on the website may not be suitable for all investors because of the risk of losing all of your invested capital. You should never invest money that you cannot afford to lose and never trade with borrowed money. Before trading in the complex products offered, please be sure to understand the risks involved.