Synthetic indices have grown in popularity among traders for their unique trading environment, consistent performance, and availability 24/7. Unlike traditional financial markets, synthetic indices are simulated markets that mimic the behavior of real-world assets but operate independently of economic and geopolitical events. This article explores what synthetic indices are, what is traded, and why they are a popular choice for many traders.

What Are Synthetic Indices

Synthetic indices are financial instruments that simulate real-world market behaviors using complex algorithms. These indices are created by brokers to offer a trading environment that eliminates external market influences such as central bank decisions, global crises, or corporate earnings reports.

Why Trade Synthetic Indices?

Synthetic indices offer several advantages over traditional trading instruments, they include:

• Accessibility and Availability

Synthetic indices are available 24/7, making them accessible to traders in any time zone.

• Independence from External Influences

Unlike forex or stock markets, synthetic indices are not affected by news events, economic data releases, or political uncertainties. This makes them more predictable for technical traders.

• High Volatility Opportunities

Volatility indices and boom/crash indices provide significant opportunities for traders who thrive on price fluctuations.

• Risk Management Features

Traders can use stop-loss orders, take-profit levels, and other risk management tools to safeguard their capital.

Types of Synthetic Indices Traded by Various Brokers

When it comes to Synthetic indices, Deriv has been the leading broker that offers Synthetic indices. However, there are other platforms that offer synthetic indices peculiar to them. These synthetic indices come in various forms, catering to different risk appetites and trading strategies. Here are some common types:

Deriv

Deriv has been an online trading platform offering numerous synthetic indices which includes:

Drift Switching Indices

These indices alternate between bullish, bearish, and neutral trends at regular intervals (e.g., every 10, 20, or 30 minutes). This structured pattern provides predictability for traders, making it ideal for trend-following and range trading strategies.

DEX Indices

Known for significant price fluctuations, DEX Indices exhibit sharp price movements at intervals of 15, 30, or 45 minutes. These dramatic swings are suited for momentum and breakout strategies but require fast decision-making and risk management.

Volatility Indices

Highly volatile, these indices simulate markets with large price fluctuations. Popular indices like VIX 75 offer rapid price changes, providing significant profit potential but also higher risks. Trend-following and momentum strategies are most effective here.

Step Indices

Offering steady price movements without large swings, Step Indices are ideal for beginners or risk-averse traders. They exhibit small, consistent price changes, which make them suitable for range trading and trend-following strategies.

Range Break Indices

These indices oscillate within a set range before breaking out dramatically. The breakout periods provide profit opportunities, making them ideal for swing traders who can hold positions through consolidation phases.

Crash and Boom Indices

Characterized by sharp upward (Boom) or downward (Crash) movements, these indices are favored by scalpers. Quick reactions and active monitoring are necessary for success, with scalping and reversal strategies being most effective.

Jump Indices

These indices experience large, sudden price movements in either direction. Traders who thrive on rapid market shifts can use momentum and breakout strategies to profit from these irregular price jumps.

Daily Reset Indices

Resetting every 24 hours, these indices offer fresh market conditions each day. They are best suited for day traders and trend-following strategies, as they provide consistent and steady opportunities for profit.

Multi Step Indices

Combining predictable smaller movements with occasional larger jumps, Multi Step Indices appeal to traders who seek steady trades with the potential for larger profits. Scalping and breakout strategies work well for these indices.

Hybrid Indices

These combine predictable price trends with occasional volatility spikes, offering a balance between stability and high-reward potential. They are suitable for trend-following and momentum strategies, with added volatility for increased profit opportunities.

Skewed Step Indices

These indices offer mostly small, predictable price movements with occasional larger jumps. This pattern is ideal for scalpers who can profit from frequent small moves while also preparing for bigger price shifts.

FXGT – GTi12 Synthetic Index

FXGT offers the GTi12, a unique synthetic index designed to track the price movements of a basket of 12 major cryptocurrencies. These include well-known cryptos like Bitcoin (BTC), Ethereum (ETH), and Litecoin (LTC), among others. The GTi12 index is available for 24/7 trading, making it suitable for traders who want to capitalize on the continuous fluctuations in the cryptocurrency market without the limitations of traditional trading hours. The advantage of trading a basket of cryptocurrencies is that it provides a more diversified exposure to the crypto market, reducing the risk associated with trading individual coins. Moreover, FXGT also provides synthetic pairs like Bitcoin vs. Gold and Bitcoin vs. stocks (e.g., Apple and Nasdaq 100), allowing traders to speculate on cross-asset movements, a feature that adds another layer of strategy to their trading options

HFM (HotForex) – VIX Index

HFM (HotForex) offers a VIX Index, which is a popular synthetic index that tracks market volatility. The VIX, also known as the “Fear Index,” reflects the implied volatility of options on the S&P 500 and is often used as a gauge of market fear and uncertainty. The VIX index offered by HotForex allows traders to speculate on market volatility, which makes it an attractive instrument during times of market uncertainty or sharp price movements. Unlike traditional market indices, the VIX does not rely on the performance of stocks but instead on the volatility expectations. With MetaTrader 4 (MT4) and MetaTrader 5 (MT5) platforms supporting the VIX index, traders have access to advanced charting and trading tools to make well-informed decisions.

Pepperstone and Other Global Indices

Pepperstone also provides synthetic indices like the VIX Index, along with access to other global indices. The VIX index offered by Pepperstone is similar to the one available through HotForex, allowing traders to speculate on volatility with the flexibility to trade it alongside other financial instruments like stocks and forex pairs. With low spreads and fast execution speeds, Pepperstone enhances its offering for traders looking for efficient and timely trades in synthetic indices. The broker also supports platforms such as MT4, MT5, and cTrader, giving traders a variety of tools for analysis and order execution. Pepperstone’s liquidity, low cost of trading, and support for synthetic indices provide a robust trading environment for those focused-on volatility-based trading.

How Synthetic Indices Are Traded

Trading synthetic indices involves speculation on price movements using a variety of trading platforms and strategies. Below are the key areas of trading these instruments:

a. Platforms for Trading Synthetic Indices

Many brokers provide synthetic indices trading, with popular platforms including MetaTrader 4, MetaTrader 5, and proprietary trading software. These platforms offer tools like:

• Charts for technical analysis
• Automated trading options
• Risk management features such as stop-loss and take-profit orders

b. Leverage and Margin Requirements

Synthetic indices often come with flexible leverage options, allowing traders to magnify their positions. However, higher leverage increases risk, making it essential to manage positions wisely.

Synthetic Indices Trading Strategies

Now you have a basic knowledge of synthetic indices, we will look at some effective trading strategies you can use to harness their potential:

1. Trend Following: This classic strategy involves identifying and trading in the direction of prevailing market trends. By using technical analysis tools like moving averages and trendlines, you can catch and ride market trends within the synthetic index.
2. Range Trading: Range-bound markets can provide profitable opportunities in synthetic indices trading. In this strategy, you aim to buy at the lower end of a trading range and sell at the upper end, profiting from price oscillations.
3. Breakout Trading: This strategy involves identifying key support and resistance levels within the synthetic index and entering trades when these levels are breached. Breakouts can lead to significant price movements.
4. Diversified Portfolio Approach: You can create a diversified portfolio of different synthetic indices, each tracking different asset classes. This approach helps spread risk and offers a balanced approach to trading.
5. News Trading: Being aware of economic events and market news is crucial for this strategy. Traders seek to capitalize on significant market movements resulting from economic announcements, such as interest rate changes or employment data releases.

Where and How to Start Trading Synthetic Indices

You’re probably excited to jump into the world of synthetic indices trading, but first, you need to know where and how to start:

1. Choose a Reputable Broker: Start by selecting a reputable broker that offers synthetic indices trading. Look for a broker with a strong track record, regulatory compliance and a user-friendly trading platform.
2. Account Setup: Once you’ve chosen a broker, set up your trading account. This involves verifying your identity and providing the necessary documentation.
3. Educational Resources: Take advantage of the educational resources provided by your broker. Most brokers offer tutorials, webinars and guides to help you understand the specifics of synthetic indices trading.
4. Practice with a Demo Account: Before risking real capital, practice your trading strategies with a demo account. This allows you to get comfortable with the trading platform and test your strategies in a risk-free environment.
5. Risk Management: Develop a solid risk management strategy. You should start by deciding the amount of capital you’re willing to risk on each trade and then setting stop-loss orders to limit the risk. You should also determine your own clear risk-reward ratio.
6. Start Small: It is always a good idea that even when you feel ready to trade real money, you start with a small amount. You will still be relatively inexperienced, especially in a live market, and you can gradually increase your position sizes as your confidence grows.
7. Stay Informed: Keep yourself updated with market news and events that may impact the underlying assets in your chosen synthetic indices.
8. Monitor and Adapt: Continuously monitor your trades and adapt your strategies as market conditions change. This adaptability is a key skill for successful synthetic indices trading.

Challenges of Trading Synthetic Indices

While synthetic indices offer numerous benefits, they also present unique challenges:

a. High Leverage Risk

The use of leverage can amplify losses, requiring disciplined risk management.

b. Overtrading

The 24/7 availability of synthetic indices can lead to overtrading, which often results in poor decision-making and losses.

c. Lack of Fundamental Analysis

Since synthetic indices are independent of real-world markets, traders cannot rely on fundamental analysis, which can limit diversification in trading strategies.

d. Dependence on Broker Platforms

Traders must rely on brokers for synthetic indices, making it crucial to choose a reputable broker with fair pricing and reliable platforms.

Conclusion

Synthetic indices have carved a niche in the trading world for their independence from real-world markets, high volatility, and 24/7 availability. However, like all trading activities, understanding the risks and developing a robust trading strategy is crucial for long-term success.

No matter where you are on your trading journey, as seasoned trader or trading enthusiasts, synthetic indices is full of opportunities for those ready to dive in. Trading involves risk, so never invest more than you can afford to lose. 

Trading is a continuous learning process and stay committed to expanding your knowledge, analyzing your results, and keeping up with market trends will guarantee your success. While synthetic indices trading offers the potential for rewarding outcomes, success comes to those who approach it with preparation, patience, and a steady mindset. 

Frequently Asked Questions (FAQs)

Are synthetic indices real financial instruments?

• No, synthetic indices are simulated markets created by brokers. They mimic real-world market behaviors without being tied to any physical or financial assets.

What are the best platforms for trading synthetic indices?

• Popular platforms include MetaTrader 4, MetaTrader 5, and proprietary broker platforms like Deriv’s trading software.

Can beginners trade synthetic indices?

• Yes, synthetic indices like Step Indices are ideal for beginners due to their predictable price movements and controlled risk levels.

Are synthetic indices risky?

• While synthetic indices offer high-profit potential, they also carry significant risks due to high volatility and leverage. Proper risk management is essential.

Do synthetic indices follow global market trends?

• No, synthetic indices are independent of global markets, making them unaffected by external factors like geopolitical events or economic data releases.

Can I trade synthetic indices 24/7?

• Yes, synthetic indices are available for trading 24/7, providing flexibility for traders in different time zones.