What does synthetic indices meaning Synthetic index. How does synthetic indices work. How do synthetic indices work. How synthetic indices work. What's synthetic indices. Synthetic indices are the simulated markets that work like real markets. But the price numbers are generated randomly by a fully secured computer program. This program is handled by fully independent third-party companies. These indices are programmed in such a way that natural disasters do not affect the working of indices. There are many advantages of these indices over the other forex currency pairs. That’s why retail traders like to trade such types of indices. There are five major categories of synthetic indices and they are further classified into different types depending on their characteristics. Volatility indicesCrash/Boom indicesJump indicesRange Break indicesTrading indices are easy to some extent as compared to forex or stocks. Because of few characteristics, synthetic indices have captured the attention of many retail traders.In trading a currency pair or stocks, fundamentals have large control. Fundamental news can turn the market up or down. It also creates an environment of fear among retail traders. Also, it increases the spread and it becomes difficult to trade during that time. But these indices are free from any fundamental news. Any news has zero impact on synthetic indicesThe most important factor that influences the trading strategy is the spread. Sometimes spread causes loss in a winning trade. You can’t trade some currency pairs on lower timeframes because of the large spread. But the spread is too much low in synthetic indices. This is also a plus point. In forex, you cannot trade over the weekend because the forex market remains close. So forex is a 24/5 market. But Synthetic indices work all the time. You can trade any time or at any big event. This is a 24/7 market.These are few major characteristics that make difference between synthetic indices and the forex market.There are five types of Volatility indices. It depends on the characteristics of a particular index.Here is the list of all volatility indicesVolatility 10 indexVolatility 25 indexVolatility 50 indexVolatility 75 indexVolatility 100 indexThe numbers 10, 25, 50… represent the real market volatility. 10 means it includes 10% market volatility. 75 means 75% market volatility. The volatility 75 index is a popular index among retail traders. These types of indices are programmed in such a way that a crash or Boom occurs in the index after a specific interval of time. There are four main types of crash/boom indicesCrash 1000 indexCrash 500 indexBoom 1000 indexBoom 500 indexLike Volatility indices, jump indices also include a fixed percentage of Volatility. According to the deriv market, a jump in this index occurs after every 20 minutes. There are five major types of jump indicesJump 10 indexJump 25 indexJump 50 indexJump 75 indexJump 100 indexThe range Break index shows a similar market pattern. For example, it forms a range for a specific time and then breaks the range to form an impulsive move. After an impulsive move, it again forms the ranging market pattern. They are only offered by DERIV brokers. Because these are indices that are programmed by computer software. That’s why most brokers do not support such types of indices. Deriv is the broker that supports all types of synthetic indices. If you want to trade indices specially Volatility indices then you can create a demo account by clicking here. Yes, it can be manipulated. Because, unlike forex or stock market, synthetic indices are not natural. They are controlled by computer software that generates numbers randomly. But the deriv broker believed that they are secured cryptographically. So there is less chance of manipulation.According to our recommendation, you should avoid trading these indices if you have a big account size. Less than $50k can trade without any worry of manipulation.No, synthetic indices are not available in MetaTrader 4 or MetaTrader 5.These indices are good to trade. If you have a strategy that’s failing because of spread. Then, you should try to trade these indices. Synthetic indices are a relatively new class of trading instruments that can provide asymmetrical market risk for investors and traders. There is plenty of public misconception about how they work and in this post, we hope to clarify how they work and why you should consider them. Synthetic indices are complex financial instruments and as such it’s important to fully understand their risk before you decide to trad them. SummarySynthetic indices are artificial financial instruments available for trading based on a number generator that is secured through cryptographyThe main company that provides trading access for these artificial indices is DerivYou can trade these instruments 24/7 as the market is always open for them There are 6 different types of synthetic indices available for trading: volatility, crash & boom, continuous, step, range break, and jump indicesThey are considered highly volatile and leveraged and should be treated with extreme caution Synthetic indices are artificial financial instruments that were created to mimic real-world market movements in different markets based on a random number generator that is secured through cryptography.This mechanism is used to prevent market manipulation and improve financial transparency. The broker that provides trading for these instruments can’t manipulate the price or predict which numbers will be generated to maintain trading.They are just like other trading instruments, but they have constant volatility and trade 24 hours a day 7 days a week. News events or natural disasters don’t have an impact on their pricing. The price of these indices is generated randomly by a highly specialized computer program and is audited by a third-party program. This makes synthetic indices completely speculative and extremely risky in nature due to their unpredictable price behavior.As previously mentioned, the prices of synthetic indices are generated randomly by a highly sophisticated computer program that gets audited by a third-party program to uphold fairness and transparency. They are not real financial instruments, they are stimulated to reflect real market instruments. The main trading broker who sponsors access for synthetic indices is Deriv. It’s important to note the following properties of synthetic indices:The price can’t be manipulated by a single individual or large block tradesDeriv does not have access to the price before it is generatedThe price that will be generated is not known as it is randomly generated by the computer systemThese properties make synthetic indices products extremely risky and speculative, therefore they should be treated with extreme caution.Synthetic indices offer a highly leveraged trading environment along with tight spreads for traders. If you want to trade an instrument that is highly volatile and provides trading 24/7, synthetic indices are an option. It’s important to note that trading synthetic indices don’t require a ton of capital. You can start trading them with less than $1,000.Although they are unpredictable instruments, traders are aware of the risks of trading synthetic indices from the start. There is also a good amount of indices available for trading that can provide different levels of risk and exposure for traders.Synthetic indices have 6 major categories available for trading. They include:The volatility indices are artificial indices that reflect real-world markets with non-stop volatility. These indices have constant volatility with given percentages with each tick that is generated. For example, the volatility 75 index has constant volatilities of 75% with one tick generated every second.The fixed volatility component is advantageous to traders because they know the volatility amount before it even happens. Below are the most popular volatility indices available for trading.InstrumentDescriptionVolatility 10 (1s)An index with constant volatilities of 10% with One tick is generated every secondVolatility 25 (1s)An index with constant volatilities of 25% with One tick is generated every secondVolatility 50 (1s)An index with constant volatilities of 50% with One tick is generated every secondVolatility 75 (1s)An index with constant volatilities of 75% with One tick is generated every secondVolatility 100 (1s)An index with constant volatilities of 100% with One tick is generated every secondVolatility 10An index with constant volatilities of 10% with One tick is generated every two secondVolatility 25An index with constant volatilities of 25% with One tick is generated every two secondVolatility 50An index with constant volatilities of 50% with One tick is generated every two secondVolatility 75An index with constant volatilities of 75% with One tick is generated every two secondVolatility 100An index with constant volatilities of 100% with One tick is generated every two secondCrash and boom indices are meant to reflect fluctuating real-world monetary markets. They behave very similarly to normal financial markets and have different price behavior compared to volatility indices.For example, the Boom 500 Index has on average 1 spike in its price series every 500 price ticks. On the other hand, the Crash 500 Index has on average 1 drop in the price series every 500 ticks. This price behavior helps traders quantify and more accurately predict price booms and crashes. Below are the most popular crash and boom indices available for trading.InstrumentDescriptionCrash 1000On average 1 drop occurs in the price series every 1000 ticksCrash 500On average 1 drop occurs in the price series every 500 ticksInstrumentDescriptionBoom 1000On average 1 spike occurs in the price series every 1000 ticksBoom 500On average 1 spike occurs in the price series every 500 ticksAs the name implies, continuous indices never stop trading. They trade 24/7/365. An advantage to the continuous index is that you can trade on the weekends when the regular market isn’t open. The majority of synthetic indices are continuous.The step-index mimics the real market step by step. It has an equal probability of going up and down and has a fixed step size of .10. Advantages to using the step-index is knowing the exact probability of the market going up and down which allows you to manage your risk accordingly.Range break indices simulate a ranging market that breaks out of a trading range after a certain amount of attempts. The two most popular range break indices are the Range 100 index and Range 200 index. The Range 100 index breaks out after an average of 100 attempts while the Range 200 index breaks out after an average of 200 attempts. Below are the most popular range break indices available for trading.InstrumentDescriptionRange Break 100Index that breaks the range once every 100 attempts on averageRange Break 200Index that breaks the range once every 200 attempts on averageThe jump indices measure the price jumps of an index with an assigned uniform volatility percentage per hour. For example, the Jump 10 Index has an average of 3 jumps per hour with uniform volatility of 10%.Let’s take a look at some of the most popular step indices available for trading.InstrumentDescriptionJump 10An index with 10% volatility and 3 jumps per hour on averageJump 25An index with 25% volatility and 3 jumps per hour on averageJump 50An index with 50% volatility and 3 jumps per hour on averageJump 75An index with 75% volatility and 3 jumps per hour on averageJump 100An index with 100% volatility and 3 jumps per hour on averageThe Volatility 75 Index is the most popular synthetic index to trade. The reason it’s the most popular choice for traders is that it’s the easiest to make money with using a small trade size.This index has a 75% volatility and 3 jumps per hour on average. This provides traders with plenty of volatility to make money with a small amount of cash.There are some important advantages to trading synthetic indices over other financial derivatives.They have uniform volatility. This provides a fixed level of risk for traders as they know what kind of volatility behavior the index they are trading will have.You can trade them 24/7/365. Unlike stocks, forex, options, or futures which are available for trading only at certain times of the working week, synthetic indices can be traded anytime. Different instrument options. There are different synthetic markets that you can trade that behave differently and offer different risk characteristics and parameters. Fundamental factors don’t impact the price of synthetic indices. Interest rate announcements and inflation data don’t directly impact the price of the instruments.Although synthetic indices have their advantages, they also come with their own set of disadvantages as well.They can be extremely volatile. Although this is quite obvious it’s important to understand just how volatile these products can be. If you don’t understand position sizing and the type of synthetic index you are trading, you can quickly lose all your capital.Limited brokers offer them for trading. There are very few brokers that offer synthetic indices for trading with the most popular broker (Deriv) operating out of the EU. Can pose overtrading risk. Since they are available for trading 24/7, traders can become very prone to overtrading if they don’t have proper discipline and risk management practices in place.If you decide to trade synthetic indices, we highly advise that you first trade them on a demo account before going live. Give yourself some time to learn their volatility in a demo environment before you decide to trade them in a live environment.
