The Ultimate Beginners Guide To Trading Synthetic Indices From Deriv (2021)

  • Get all the information you need to know about trading synthetic indices including volatility indices
  • Learn what moves these synthetic indices and how you can trade them profitably
  • Get tips on how you can make money from synthetic indices without even trading them

 

Introduction To Synthetic Indices

Synthetic Indices have are the most popularly traded assets in Africa. This is despite them being relatively new instruments and being offered by only one broker the financial market.

A lot of groups on social media (Facebook, WhatsApp & Telegram) have been set up by traders to discuss and share signals on synthetic indices.

Synthetic indices have been traded for over 10 years with a proven track record for reliability and continue to grow in popularity.

Here we will let you know all about the synthetic indices so you can see why they are popular. We will also show you how you can get started with trading these various synthetic indices.

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What Are Synthetic Indices

Synthetic Indices are a family of trading instruments that emulate or copy the behaviour of the real-world financial markets but they are not affected by world events or news. Synthetic indices are available 24/7, have constant volatility, fixed generation intervals, and are free of market and liquidity risks.

In other words, synthetic indices move like real-world markets but their movement is not caused by an underlying asset.

Stock markets, for example, move in response to the price movement of the stock. The same happens in forex markets where the forex chart moves up and down in response to the price of the forex pair.

What Moves Synthetic Indices?

Synthetic indices move due to randomly generated numbers that come from a  cryptographically secure computer programme (algorithm) that has a high level of transparency.

The random number generator has been programmed in such a way that the numbers it gives out will reflect the same up, down and sideways movement that you will see on a forex or stock chart.

Does Deriv Manipulate The Movement Of Synthetic Indices?

No, Deriv does not manipulate the movement of synthetic and volatility indices. In fact, this would be illegal and unfair as they could turn the market against traders.

The random number generator that moves the volatility indices charts is continually audited for fairness by an independent third party to ensure fairness and the broker cannot predict the numbers that will be generated

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Which Brokers Offer Synthetic Indices Trading?

There is only one broker that offers synthetic indices trading in the world. That broker is Deriv. The broker, which recently rebranded from Binary.com, has been in existence since 2000. Deriv also offers crypto, forex and stock trading and is the preferred choice of over 1 million traders worldwide.

In Africa, Deriv is the most popular broker and there are some traders that only trade these volatility indices exclusively. In countries like Nigeria, South Africa, Zimbabwe and Mozambique, Deriv has seen incredible growth due to traders wanting to try out these synthetic indices.

Why Does Only One Broker (Deriv) Offer Synthetic Indices?

Deriv is the only broker that offers synthetic indices trading in the world because it is the broker that ‘created and owns’ these synthetic indices. No other broker can offer these trading instruments because they do not have access to the random number generator and if they did, it would be illegal.

On the contrary, over 1000 brokers offer forex and stock trading instruments because no one ‘owns’ these markets. Any broker that can get real-time quotes of the forex and stock markets can easily provide them for trading to their clients.

What Are The Types Of Synthetic Indices Offered By Deriv?

Deriv offers the following types of synthetic indices that have different movements.

  • Volatility Indices
  • Crash & Boom Indices
  • The Step Index
  • Range Break Indices
  • Jump Index

1.)  Volatility Indices
Volatility Indices on Deriv.com are real-time monetary market indicators of expected uniform volatility over a certain period of time. Monetary market volatility is measured on a scale from 1 to 100 with 100 being maximum volatility.

The constant volatilities of the indices offered by Deriv are 10%, 25%, 50%, 75% and 100%.

There are a number of volatility indices including:

  • Volatility 10 Index (V10 Index) 
  • Volatility 25 Index (V25 Index)
  • Volatility 50 Index (V50 Index)
  • Volatility 75 Index (V75 Index) The most popular volatility index
  • Volatility 100 Index (V100 Index) the most volatile synthetic index

Deriv Volatility Indices

Volatility 10 index is the least volatile while volatility 100 index represents the most volatile market conditions.

There is also another type of volatility indices that are called (1s). These also range from 10% to 100% volatility. The key difference is that they update at the rate of one tick per second as compared to the normal volatility indices which update at the rate of one tick every two seconds.

A tick is the minimum price movement of an index.

2.)  Crash & Boom Indices

The crash and boom indices simulate rising and falling real-world monetary markets. In other words, they behave specifically like a booming or crashing financial market.

They are different from volatility indices or currencies which have a more ‘normal’ behaviour.

There are four types of boom and crash indices namely:

  • Boom 500 Index
  • Boom 1000 Index
  • Crash 500 Index
  • Crash 1000 Index

The  Boom 500 index has on average 1 spike in the price series every 500 ticks while the Boom 1000 index has on average 1 spike in the price series every 1000 ticks.

Similarly, the Crash 500 Index has on average 1 drop in the price series every 500 ticks, while the Crash 1000 Index has on average one drop in the price series every 1000 ticks.

Crash 500 Index from Deriv.com
Crash 500 index from Deriv showing the red price drops on the 1-minute chart.

3.)  The Step Index.

The Step Index simulates a market step by step. It has an equal probability of going up or down with a fixed step of 0.1.

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4.)  Range Break Indices

The range break indices simulate a ranging market that breaks out of the range after a number of attempts on average.

There are two types of Range Break indices: 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 200 attempts on average.

Range 500 Index From Deriv
Range 500 Index From Deriv showing breakouts on the 1-minute chart

6.)  Jump Indices

The Jump indices measure jumps of an index with assigned Volatility. There are 4 jump indices namely;

  • Jump 10 Index,
  • Jump 25 Index,
  • Jump 50 Index
  • and Jump 100 index

The jump 10 index has an average of three jumps per hour with uniform volatility of 10%. The Jump 100 index has 3 jumps per hour with uniform volatility of 100%.

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Lot Sizes in Synthetic Indices 

Lot sizes determine the smallest trade amount you can place. Let’s see how lot sizes work with volatility indices.

What are the minimum lot sizes in trading synthetic indices?

Volatility Index
Smallest lot size
Volatility 10 Index0.3
Volatility 25 Index0.50
Volatility 50 Index3
Volatility 75 Index0.001
Volatility 100 Index0.2
Volatility 10 (1s) Index0.5
Volatility 25 (1s) Index 0.50
Volatility 50 (1s) Index0.005
Volatility 75 (1s) Index0.005
Volatility 100 (1s) Index & Step Index0.1
Boom 1000 Index0.2
Crash1000 Index0.2
Boom 500 Index0.2
Crash 500 Index0.2

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How do you calculate synthetic indices lot sizes?

Calculating the lot sizes in synthetic indices trading can be a bit tricky. This is because each synthetic index has its own different lot size as opposed to forex where all pairs use the same lot size with the minimum being 0.01.

MT5 works with a system called points which is the smallest value that an instrument can change by. This changes from symbol to symbol depending on the accuracy of the price.
If, for example, the price has 2 digits after the comma (e.g. 1014.76) then 1 point = 0.01. So then, 500 points on this symbol would equal 5.00. Examples of synthetic indices with two digits after the comma include the Jump Indices, V10 (1s) & V25 (1s).
If a symbol has 4 digits after the comma (e.g. 1.1213) then 1 point = 0.0001. So then, 500 points on this symbol would equal 0.0050. This applies to synthetic indices like Boom & Crash 1000.

How to calculate minimum synthetic indices stop-loss & take profit levels

With the above in mind, we have a concept called stops levels which is the minimum distance from the current price that you can place any pending orders (including stop loss and take profit).
This is also defined in points.
So if for example, the client wants to set a stop-loss on a 2 digit symbol with stops level = 5000 points, where this would be equivalent to $50.00 for this symbol. This means that if the current price is $1000.00, then the closest the client can place a stop-loss order is at $950 (or $50 away from the current price).
The same logic applies for TP, but this would be above the current price, at $1050.
This is how you calculate points in MT5. You don’t need a synthetic indices pip calculator.

Synthetic Indices Vs Forex

Now we are going to compare synthetic indices vs forex to see their similarities & differences.

Similarities between Synthetic Indices & Forex

  • both markets can be traded on the MT5 platform and you can place pending orders
  • both markets can be traded using price action
  • candlestick formation is the same in synthetic indices and forex markets
  • you can demo trade synthetic indices and forex
  • you can trade both using leverage
  • both can be traded as binary options
  • both can be traded as contract for differences (CFD’s)

Differences between Synthetic Indices & Forex

  • synthetic indices can be traded 24/7/365 while forex trading in only available 24/5
  • only on broker (Deriv) offers synthetic indices while there are thousands of forex brokers.
  • synthetic indices have uniform volatility while the volatility of forex pairs fluctuates
  • forex pairs are affected by news & other world events but synthetic indices are not
  • there are more forex pairs than synthetic indices
  • synthetic indices move due to the numbers generated by a computer program while forex pairs move due to the economic indicators of the respective countries.
  • all forex pairs can be traded using 0.01 lot size while the lot sizes for synthetic indices vary from index to index

Deriv Step Index

Advantages & Disadvantages Of Trading Synthetic Indices

Now let’s look at the advantages and disadvantages of trading these popular synthetic indices.

Advantages Of Trading Synthetic Indices 

  • you can trade them anytime, any day throughout the year including holidays. This makes them very convenient
  • Synthetic indices are not affected by news and other fundamentals. These can really cause wild price movements e.g non-farm payroll’s (NFP) effect on USD pairs
  • there are no negative balances when you trade synthetic indices
  • you can start trading synthetic indices with low capital
  • They’re not subject to manipulation or fixing.
  • They’re ideal for automated trading with continuous quotes and no gaps.
  • they have uniform volatility
  • you can trade them using price action
  • they have tight spreads and high leverage (margin trading)

Disadvantages Of Trading Synthetic Indices 

  • there are fewer synthetic indices to choose from as compared to forex pairs
  • they are very volatile. While this can give opportunities for getting profit, it can also amplify losses
  • some synthetic indices have large stop-loss levels. For example, Volatility 50 has a stop-loss level of 40 000 points or about US$12 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.
  • the fact that you can trade synthetics round the clock means that there is a real danger of overtrading. Overtrading can lead to blown accounts.
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How Do You Trade Synthetic Indices On MT5?

To trade Deriv synthetic indices on MT5 you need to follow these easy seven steps:

  1. Register a demo account on Deriv by clicking here and entering your email and verifying in in your inbox
  2. Create a real account by clicking on the ‘Real‘ tab and choosing your default account currency
  3. Register a DMT5 synthetic account by clicking on the ‘Real” tab again and choosing the synthetic indices option. You can verify your account later.
  4. Set your password and get the login ID that you will need to login to MT5
  5. Download the MT5 platform by clicking on the indices account you have just created under the ‘Real’ tab
  6. Login to your DMT5 account and move funds from your main account to the DMT5 synthetic indices account.
  7. Choose the synthetic indices you want to trade on MT5 and start trading!

If you want detailed step-by-step instructions with pictures showing the various steps you can check out this article.

You can also visit the Deriv website by clicking on the button below

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Deriv Crash & Boom Index

Frequently Asked Questions On Synthetic Indices Trading

What is the best time to trade synthetic indices?

Synthetic indices have uniform volatility around the clock. This means that you can trade them at any time of the day. This is different from forex where there are some periods with low volatility

What is the minimum deposit need to trade Deriv synthetic indices?

There is no set minimum deposit amount needed to trade synthetic indices. You can transfer as little as $1 from your main account to your DMT5 synthetic indices account. However, the challenge with such a low deposit is that you will probably blow the account in seconds due to the volatility. We would suggest funding your trading account with at least $50 to be able to ride out any short-term reversals that may go against you.

How can I fund my DMT5 synthetic indices trading account?

You can fund your DMT5 account using payment agents, or via Dp2p if you want to use your local payment methods. You even using many of the deposit methods accepted by Deriv including Skrill, Neteller, AirTm, PerfectMoney, WebMoney etc.

Are synthetic indices manipulated?

No, synthetic indices are not manipulated by Deriv. They move due to an algorithm that has a high level of transparency.

The random number generator that moves the volatility indices charts is continually audited for fairness by an independent third party to ensure fairness and Deriv cannot predict the numbers that will be generated.

Which ones are the best synthetic indices to trade?

This depends on personal preference. There are a variety of synthetic indices that have different levels of volatility and market character. If you prefer high volatility you can choose assets like v75 and v100.

For slower volatility, you can choose indices like v210 or v25. It is best to demo trade a variety of volatility indices so you can choose which ones you prefer.

Which broker has boom and crash?

Deriv is the only broker that offers boom and crash indices. You can open an account to trade boom and crash here.

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