Trade Synthetic Indices – How it works | An Ultimate Guide

Synthetic Indices Trading; What Are Its Categories and Benefits?

Synthetic Indices Trading: Assume you have a reasonable sum of money to invest in trading, but neither you want to invest in FX Stocks that are appropriate for your investment. Because they both can’t give a full security guarantee of returns, and one wrong trend might deplete your entire portfolio. So, how would you choose between the two?

Of course! It’s challenging to invest when you know the risks, but don’t you want to find the best middle way to trade your hard-earned money? Here come the indices to get your back. Yes! Indices are in the middle of the Forex and Stock shares. They are a great way to quickly skim the state of a market and offer tight spreads and leveraged trades.

And just like other marketing indexes, synthetic indices were developed to mimic real-world market movements in various markets with the help of a random number generator. Let’s take some quick insight into what it is and how it works!

What Are Synthetic Indices In Real?

They are basically a group of trading instruments that copies real-world financial marketing movements without getting affected by world events or news. For example, Suppose you wanted to trade the S&P 500 index but needed access to the existing assets. In that case, you could develop a synthetic S&P 500 index by purchasing a basket of equities that closely mimics the underlying index’s performance.

Synthetic Indices have constant volatility and are available to trade 24/7. They are free of the market and any kind of liquidity risks and have fixed generation intervals. Low price swings and fluctuations are also among their chief advantages. As Synthetic indices work with the help of a random number generator, this approach prevents price fixing and increases the accuracy of financial reporting.

This means to keep the trade going, the broker that enables trading for these instruments cannot influence the price or forecast which numbers will generate. The price of these indices generates by a highly specialized and automated computer and audits by a third-party program.

The Deriv platform allows you to trade synthetic indices if you want to try them.

How Many Types of It Are Available In the Deriv Platform?

There are primarily six types available of Synthetic Indices in the Deriv Platform;

1.   Volatility Indices

They are the artificial indices that reflect the trading market with undefine volatility. It usually measures volatility in the stock market. They allow investors to monitor and track market risks. There are many different volatility indices, each with its methodology and index construction.

Volatility Indices

The CBOE Volatility Index (VIX) is the most popular volatility index, which measures the implied volatility of S&P 500 options. Many investors use the VIX as a barometer of market fear and a risk indicator. A low VIX indicates a low level of volatility, whereas a high VIX indicates high volatility, usually accompanied by market fear. Among other volatility indices, there is the Nasdaq 100 Volatility Index (VXN) and the Dow Jones Industrial Average Volatility Index (VDX).

2.   Crash & Boom Indices

This is the only financial instrument in the market matched against the US dollar due to its independence from fundamental issues. Trading crash and boom indices depend entirely on price movements and technical indicators. It is one of those synthetic indices that has a surge and may be profitable in either a trading spike or systematic trading. The best way to win this trading is to master any of the strategies available in the finance market.

Crash & Boom Indices

However, while trading crashes and boom indices, you must be conscious of price movement, stop the loss hunt, understand risk management, and build a target-based trading strategy. It will help you win the trade without using complicated tactics at first.

3.   Jump Indices

There is a good reputation for this synthetic index for immediately giving fast profits. To get successful in jump indices, you should understand the actual price action, trade only patterns and trends, use conservative lot sizes, and always remember to lock the profits.

Jump Indices

Furthermore, the Jump 10 index, Jump 25 index, Jump 50 index, Jump 75 index, and Jump 100 index are currently available mainly on the Deriv platform.

4.   Range Break Indices

Trading range-bound markets are typically more complex and less rewarding. This is because most traders gain more when the market is turbulent or volatile. But there are several strategies you may use to analyze and trade in these marketplaces. You can use indicators like Average True Range, Bollinger Bands, Donchian Channel, etc.; this will help you explore the trends and patterns more appropriately.

Advantages & Disadvantages Of Synthetic Indices

Following are the benefits of using Synthetic Indices;

  • They are much cheaper to trade than monetary funds. This is because you only purchase a limited number of assets rather than the hundreds or even thousands that comprise a valid index.
  • Getting in and out of trades with synthetic indices is easier because they can be more liquid than some underlying markets.
  • They offer traders exposure to a wide range of markets without having to trade each individually, saving time and money. For example, rather than having to trade each individual stock in the S&P 500, you could simply trade one synthetic S&P 500 index.

However, just like the advantages, there are also some disadvantages of synthetic indices trading, and investors should know about it. First, synthetic indices are often created by large financial institutions and may bias in favor of those companies. Second, because they are made using financial products, they may be more volatile than traditional indices. Finally, they may not be as well-regulated as traditional indices, so there is a greater risk of fraud or manipulation.

Why Should You Trade Synthetic Indices?

When it comes to synthetic trading indices, there are a few crucial reasons why you should do so. To begin, synthetic indices might be an excellent approach to trading the market without risking money. This is because when you trade synthetics, you effectively invest in the underlying stock’s movement without owning it. This means that you can involve in the market without taking on any risk, which is ideal if you are new to trading or want to test out a new strategy.

Another reason to trade synthetics is that they can provide an excellent way to hedge your positions. In the case of stock and share portfolios, synthetic indices can help offset potential losses. Lastly, synthetic indices can be a great way to make some extra income. Because they base on the movement of underlying assets, they can trade for profit just like any other asset class.

Wrapping Up

Synthetic Indices are a great way to earn profits and returns, but before stepping professionally into this, use a demo account to learn and analyze trade trends thoroughly. The more you know the strategies before, the more it will help you understand and win the trades the first time.


What is the best time to trade Synthetic indices?

The time is between 9:30 and 10:30 am. ET is one of the finest times of the day since it provides the most significant changes in the smallest period.

Which broker is the best to trade Synthetic indices?

XTB, Pepperstone, eToro, Oanda, IC markets, XM, Ava Trade, Naga Markets, etc., are among the best brokers to trade synthetic indices.

Where does the money from synthetic indices come from?

A synthetic index simulates the market, so the price action primarily derives from algorithms, and random numbers generate the behavior. Some behave like fundamental monetary markets, and some are computer-generated.

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