What Are Synthetic Indices and How Can You Trade Them?

Mitchelle O.D

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Updated on 04/10/2024

Trading has evolved significantly over the past few years, with more and more people looking for new ways to trade the markets. One of the more recent and exciting options is trading synthetic indices.

In this blog post, we’ll explain what synthetic indices are, how you can trade them, and which brokers allow you to do so.

What Are Synthetic Indices?

At their core, synthetic indices are unique indices that mimic the behaviour of real-world markets but are not influenced by global news, economic events, or geopolitical factors.

Unlike traditional indices like the S&P 500 or Nasdaq, which reflect the performance of actual stocks or sectors, synthetic indices are unrelated to real-world assets.

Instead, they rely on a cryptographically secure random number generator that creates market-like conditions while maintaining a continuous trading environment.

So what exactly does this mean?

Synthetic indices traders don’t have to worry about external market factors like inflation reports or unemployment rates.

They can focus purely on technical analysis when determining the price movements of these indices.

Why Trade Synthetic Indices?

Synthetic indices are available for trading 24/7, 365 days a year because they’re not dependent on real-world assets, a specific exchange or a time zone. You can trade during holidays or weekends at any time.

Therefore, you have more flexibility to execute strategies that suit your schedule and preferences.

Where Can You Trade Synthetic Indices?

Deriv (formerly Binary) is the only fully regulated broker that offers synthetic indices as trading assets.

Deriv Logo

The Different Types of Synthetic Indices

One of the most exciting parts of trading synthetic indices is the variety of options available. Let’s break them down:

Volatility Indices

Volatility indices simulate varying levels of market volatility. These include Volatility 10, 25, 50, 75, and 100 Indices, with higher numbers representing higher volatility.

Crash and Boom Indices

Crash and Boom Indices mimic markets experiencing sudden downward (Crash) or upward (Boom) price movements. They can also offer opportunities to trade long-term declines or upward trends.

Range Break Indices

These indices move when prices break out of a set range. Traders who prefer predictable movements often choose Range Break Indices, since you can apply breakout strategies to them.

Step Indices

Step Indices move in fixed steps, usually between 0.1 and 0.5. This steady and predictable movement makes them an excellent choice for traders who prefer lower-risk and more consistent trades.

Jump Indices

Jump Indices simulate markets with sudden price jumps. The jumps can happen at varying intervals and intensities.

These indices offer different levels of volatility, from 10% to 100%. So there are opportunities for both consistency and quick profits.

DEX Indices

DEX indices are synthetic indices designed to simulate the impact of news events on market prices. Major price jumps and drops occur on average, every 600, 900 or 1,500 seconds, depending on the DEX index you’re trading.

Pros and Cons of Trading Each Type of Synthetic Index

With so many different types of synthetic indices, it's important to weigh their benefits and drawbacks:

Volatility Indices:

• Pro: High liquidity, constant market availability, and fast-paced trading opportunities.

• Con: High risk due to volatility. This may overwhelm beginner traders.

Crash and Boom Indices:

• Pro: Excellent for capturing big market moves, allowing trend traders to capitalise on sudden shifts.

• Con: Requires constant monitoring due to sharp market reversals that can lead to losses if you're unprepared.

Range Break Indices:

• Pro: Predictable breakout patterns, ideal for traders with breakout strategies.

• Con: Price movements can be slow, making profit potential lower than in highly volatile markets.

Step Indices:

• Pro: Fixed step movements make these indices easier to manage, with reduced risk compared to high-volatility indices.

• Con: The predictability of movement can also limit profit potential for traders seeking fast, large price changes.

Jump Indices:

• Pro: Markets with sudden jumps offer opportunities for quick profits.

• Con: The unpredictable nature of jumps can make it difficult to manage risk, and traders need to be vigilant.

DEX Indices:

• Pro: Price jumps and drops offer high-profit potential for traders who can accurately predict the direction of the market.

• Con: Precisely timing entries and exits around the expected jumps and drops can be challenging without experience or careful analysis.

Accounts That Support Synthetic Indices Trading

When trading, choosing the right account type can make all the difference when implementing your strategies. Deriv offers these account options for synthetic indices trading:

Deriv MT5 Swap-Free Account

This account is perfect for traders who want to avoid swap charges (interest fees on overnight positions).

It’s a great choice for traders who prefer holding their positions for long periods and don’t want to suffer additional costs.

Deriv MT5 Zero Spread Account

The Zero Spread account is ideal for those who want to minimize trading costs, especially during high-volume trading.

By removing the spread, you get tighter price movements, which can be an advantage for precision trading.

Deriv MT5 Standard Account

The Standard Account is a versatile option for many traders. It offers a balance of trading conditions that cater to various trading styles.

Image Source: Deriv Website

Each account type caters to different trading styles. Choose one that aligns with your strategy and financial goals. And please remember that it’s important to practice and get a feel for how synthetic indices behave before jumping into live trading.

Practice Trading Synthetic Indices on a Deriv Demo Account

Click here!

NOTE: Using the above accounts, you can also trade traditional indices exclusive to Deriv. These include:

• Basket Indices: Basket indices, such as the USD Basket, measure one currency or asset against a basket of 5 liquid global currencies.

• Derived Indices: These are instruments that imitate real-world market fluctuations, providing more intricate trading opportunities for seasoned traders.

For example, the AUDUSD DFX 10 index tracks the price movement of the Australian dollar against the US dollar with a multiplier of 10.

For traders seeking more comprehensive analyses, Deriv integrates with TradingView, the best web-based charting and analysis tool for trading.

Synthetic indices trading is not available to traders living in the US, Canada, the United Arab Emirates (UAE), and Singapore.

Final Thoughts

Synthetic indices present an exciting, unique trading experience, and Deriv’s user-friendly platforms make it easy to get started.

However, while these indices can provide more opportunities to generate profits from the market, remember their potential drawbacks.

Trading may not be suited to all investors due to the high level of risk involved.