The inception of financial trading saw the likes of stocks, commodities, and currencies becoming tradable assets. However, as financial markets evolved, new, more sophisticated assets began to emerge, giving traders a wider array of investment choices. One such development is the rise of synthetic indices trading.

When the Swiss National Bank made a surprising decision on January 15, 2015, to cancel its 1.20 peg against the euro, it cast a light on the vulnerability of global financial markets. Such ‘Black Swan’ events, though rare, have profound and unpredictable impacts. From the 2008 global financial crisis to the unexpected outcomes of Brexit and the unparalleled global disruption by the COVID-19 pandemic, traders have sought assets that can provide shelter from such storms. Synthetic indices have emerged as a potential solution.

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Synthetic Indices: An Overview

At its core, synthetic indices are tailor-made indices designed to emulate real-world market movement patterns, but with a notable exception: they remain unaffected by real-world events. These indices function based on a cryptographically secure random number generator. As a result, they consistently maintain their volatility and remain insulated from the liquidity risks and market shocks.

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The Advantages of Trading Synthetic Indices

Predictable Risk Management:

One of the principal advantages of synthetic indices is the clarity they provide to traders regarding potential risks. The surprise element associated with margin calls, often a consequence of unforeseen market movements, becomes non-existent.

Cost-effective Entry:

Synthetic indices trading does not demand hefty capital investments, making it accessible to a broad spectrum of traders.

Efficient Execution and Abundant Liquidity:

Traders can expect prompt order execution and enjoy the benefits of profound liquidity at any given time.

Round-the-clock Trading:

Unlike most other trading forms, synthetic indices allow for 24/7 trading, accommodating all time zones and ensuring access during weekends and holidays.

Diverse Volatility Options:

Deriv offers a range of volatility indices like Volatility 10, 25, 50, 75, and 100. Each index caters to different trader profiles, from those preferring minimal price swings to those looking for more robust price movements.

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Trading Platforms for Synthetic Indices on Deriv

• DTrader: DTrader is the hallmark of simplicity combined with functionality. The platform boasts a user-friendly interface suitable for both beginners and seasoned traders. Apart from synthetic indices, DTrader offers a vast asset palette, ranging from forex and stock indices to commodities and cryptocurrencies. The platform is accessible via both desktop and mobile devices.
• Deriv MT5 (DMT5): DMT5 is a versatile CFD trading platform, replete with professional trading tools, plugins, customizable charts, and technical indicators, fine-tuning one’s trading strategies.
• Deriv X: As the newest addition to Deriv’s suite of platforms, Deriv X offers the opportunity to trade in multiple markets concurrently. With a highly customizable interface and a myriad of features, traders can mold their trading environment to fit their preferences.
• DBot: DBot stands out as a platform where traders can design trading bots to automate their trading processes. It’s user-friendly and doesn’t require coding expertise, allowing traders to harness the power of automation effectively.
• SmartTrader: Particularly recommended for novices, SmartTrader is intuitive and straightforward. It provides users with the tools they need to make informed trading decisions without overwhelming them.
• Deriv GO: Tailored for those on the move, Deriv GO is the mobile counterpart optimized for a seamless trading experience. With its intuitive design, trading synthetic indices becomes a breeze.

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Risks and Best Practices

While synthetic indices offer several advantages, they aren’t devoid of risk. The very algorithms that ensure their predictability also introduce a unique set of risks. It’s crucial to:

• Educate Yourself: Before diving in, ensure you understand how synthetic indices work and their inherent risks.
• Start Small: Use demo accounts offered by platforms like Deriv to familiarize yourself with the dynamics.
• Stay Updated: While synthetic indices are immune to real-world events, platforms and offerings evolve. Stay updated with the latest features and tools.
• Have a Strategy: Don’t leave trades to chance. Have a clear strategy, whether it’s short-term scalping or long-term position trading.

The trading world is vast and constantly evolving. Synthetic indices represent a blend of traditional trading principles with modern, sophisticated algorithms. They offer an intriguing alternative to standard trading, especially in an age where market unpredictability has become the norm. By understanding these assets, coupled with the right platforms and strategies, traders can navigate the intriguing waters of synthetic indices trading with confidence.

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FAQs about synthetic indices offered by Deriv

What are synthetic indices?

Synthetic indices are unique indices that simulate real-world market movement. However, unlike traditional markets, they aren’t influenced by real-world events. They rely on a cryptographically secure random number generator and maintain consistent volatility, free from market and liquidity risks.

How are synthetic indices different from regular financial markets?

Synthetic indices mirror the volatility and price dynamics of real-world markets, but they are unaffected by global events. This means traders won’t be caught off-guard by unforeseen external factors such as geopolitical events or economic downturns.

Why should I trade synthetic indices?

Synthetic indices offer several benefits, including tight spreads, leveraged trades, and trading opportunities 24/7, even on weekends and holidays. They allow traders to be aware of potential risks upfront, reducing unexpected margin calls. Furthermore, they provide fast order execution and deep liquidity at all times.

What platforms can I use to trade synthetic indices on Deriv?

Deriv offers multiple platforms to trade synthetic indices, including DTrader, Deriv MT5 (DMT5), Deriv X, DBot, SmartTrader, and Deriv GO. Each platform provides unique features suitable for different trading preferences and needs.

What are the volatility levels in synthetic indices, and what do they mean?

There are different volatility levels for synthetic indices: Volatility 10, 25, 50, 75, and 100 Index. The number indicates the volatility percentage. For instance, Volatility 10 Index maintains a 10% volatility, which is ideal for traders preferring minimal price swings. Conversely, the Volatility 100 Index has strong price swings without significant gaps.

How can I get started with synthetic indices trading on Deriv?

You can start by creating a free Deriv demo account on platforms like DTrader and Deriv MT5. This gives you a risk-free environment to practice with $10,000 virtual money. Once confident, you can switch to a real account for actual trading.

What major events have made synthetic indices an attractive option for traders?

Over the past two decades, several unexpected events have significantly impacted financial markets, making trading on these markets risky. Such events include the Swiss National Bank’s decision in 2015 to cancel its peg against the euro, the global financial crisis, Russia’s rouble rout, dropping oil prices, Brexit, and the ongoing COVID-19 pandemic. Synthetic indices offer an opportunity to trade without being impacted by such unpredictable global events.