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
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.
Crash & Boom Indices
The Step Index
Range Break Indices
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
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.
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.
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.
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%.
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?
Smallest lot size
Volatility 10 Index
Volatility 25 Index
Volatility 50 Index
Volatility 75 Index
Volatility 100 Index
Volatility 10 (1s) Index
Volatility 25 (1s) Index
Volatility 50 (1s) Index
Volatility 75 (1s) Index
Volatility 100 (1s) Index & Step Index
Boom 1000 Index
Boom 500 Index
Crash 500 Index
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
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
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.
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.
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.
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.
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.