Synthetic indices are the most popularly traded assets in Africa. This is despite them being relatively new instruments and being offeredby only one broker in the financial market.
A lot of groups on social media (Facebook, WhatsApp & Telegram) have been set up by traders to discuss and share signals on synthetic indices. Synthetic indices have been traded for over 10 years with a proven track record for reliability and continue to grow in popularity.
Here we will let you know all about the synthetic indices so you can see why they are popular.
We will also show you how you can get started with trading these various synthetic indices in South Africa.
Synthetic Indices are a group of trading instruments that reflect or copy the behaviour of the real-world financial markets. A key feature of these synthetic indices is that they are not affected by fundamentals like world events or news.
Synthetic indices are available to trade 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 & stock trading and is the preferred choice of over 2 million traders worldwide.
In Africa, Deriv is the most popular broker and some traders only trade these volatility indices exclusively.
In countries like Africa in general and South Africa in particular, Deriv has seen incredible growth due to traders wanting to participate in synthetic indices trading.
Why Is There Only One Synthetic Indices Broker (Deriv)
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. This is why there are no other synthetic indices brokers.
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.
How Do You Trade Synthetic Indices On MT5?
You need a dedicated account inside your main Deriv account to be able to trade synthetic indices on MT5.
This is because Deriv offers a variety of different trading instruments including forex currencies, cryptocurrencies, stocks, commodities and, of course, synthetic indices.
You will need different accounts within your main Deriv account to trade these different instruments.
In this section, we are going to look specifically at how you can open a synthetic indices account and then trade synthetic indices on MT5 in six easy steps.
How To Open A Deriv Synthetic Indices Account From South Africa (Six Easy Steps)
Enter your email in the box provided and click on “Create Demo Account“.
Deriv will send you an email to verify your email address. Open that email and click the link to verify your email and finish setting up your account. If the email does not arrive try checking your spam.
The email will look like this.
Choose your preferred password & country of residence.
After verifying your email address you will have a demo account on Deriv with $10 000 of virtual or demo funds that you can use to practice trading and get to know the platform and test out any trading strategies.
To trade using real money you will have to do Deriv real account registration. You do that by logging into the demo account that you created in the first step.
Click on the dropdown arrow beside the $10 000 demo balance and click on the ‘Real' tab. Click on the Add button and you will see a page where you get to choose the default account currency.
This is the currency you will use to deposit, trade & withdraw and you can't change it after you make your first deposit.
If you want you can add a cryptocurrency account by clicking on ‘Add or Manage Account“.
You will need to supply some details to finalise opening your Deriv.com real account.
You will need to add details such as your real name, address & phone number. You will need to use details that you can later verify.
This is because as part of its Know Your Customer (KYC) policy, Deriv will ask you to upload your proof of residence and ID, passport or drivers licence.
These documents ought to have the same details you will supply during the registration.
3. Open A DMT5 Synthetic Indices Trading Account
The Deriv real account you created on the step above will allow you to trade real money on binary options on Deriv. However, you will need to open a special account to trade synthetic indices on MT5.
Click on the ‘Real' tab and you will see the option to add up to three DMT5 accounts i.e synthetic indices account, financial account for trading forex, and financial STP account.
Click on the Add button next to the synthetic account and then set the password. This is the password you will use for the synthetic indices account only. It's not the main account password.
You will need this password to log in to your DTM5 synthetic indices account.
After creating the account you will now see the account listed. It will have a couple of numbers below and this will be your login ID which you will use together with the password to log in. You will also get an email with your login ID and password.
You will need to transfer funds from the main account to your DMT5 synthetic indices account so that you can trade.
NB: If you want to trade forex, stocks & indices using the DMT5 platform you will need to open a financial account.
The next step is to download the DMT5 platform so that you can trade. Click on the synthetic indices account you have just created to go to the DMT5 download page. Download the platform that works for your device.
5. Log In To Your DMT5 Account
Open your DMT5 account and Click on Settings> Use Existing account.
You will need to enter the following: Broker: Deriv Limited Server: Deriv-Server Login: put the Login ID that you got when you opened the real trading account. You can also see it when you click on the ‘Real‘ tab in your Deriv account. Password: Use the password you chose when you created the real account.
Make sure you type these correctly because if you make mistakes you will not be able to connect to your trading account.
What Are The Types Of Synthetic Indices Offered By Deriv?
Below is the list of various synthetic indices offered by Deriv.
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 several 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
These indices update at the rate of one tick every two seconds. (A tick is the minimum price movement of an index.)
Deriv also offers another type of volatility indices that update at the rate of one tick every second i.e they move faster. These are:
Volatility 10 Index (1s)
Volatility 25 Index (1s)
Volatility 50 Index (1s)
Volatility 75 Index (1s)
Volatility 100 Index (1s)
So which one is the most volatile synthetic index?
Volatility 100 index represents the most volatile market conditions while the Volatility 10 index is the least volatile.
On the (1s) volatility indices V100 (1s) is the most volatile while V10 (1s) is the least volatile.
Which one is the most popular synthetic Index?
Volatility 75 (V75) is the most popular volatility index. A lot of traders around the world prefer to trade it. One reason why it is the most popular volatility index could be that it is easier to make a lot of money using even a small lot size.
See an example below where a trader was able to make over $70 profit from a deposit of just $3 trading Volatility 75. The trader was using 0.001 which is the smallest lot size on Volatility 75.
You can trade the following binary options using volatility indices:
Up or down or Higher Lower
Ends Between/Ends Outside
Stays Between/Goes Outside
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 an 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 a range after several 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 an average of 3 jumps per hour with uniform volatility of 100%.
Lot Sizes in Synthetic Indices
Lot sizes determine the smallest trade amount you can place. This is a list of the smallest lost sizes for each different synthetic index.
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 pips and 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, you want 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
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 blowing accounts.
Synthetic indices have uniform volatility around the clock. This means that you can trade them at any time of the day. This is different from forex where there are some periods with low volatility like Monday mornings and Friday evenings.
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 R700 to be able to ride out any short-term reversals that may go against you.
You should also use the smallest lot sizes if your account balance is small.
No, it does not. Otherwise, it would be illegal as it would be grossly unfair to its clients. Binary.com, which has now rebranded to Deriv.com, has been in existence for over 20 years and is a fully regulated broker.
In the EU, Deriv is regulated by the Malta Financial Services Authority (FSA). For traders outside of the EU, the broker is licensed with the Vanuatu Financial Services Commission (FSC) and the British Virgin Islands Financial Services Commission (FSA). In addition, Deriv is regulated by Malaysia’s Labuan Financial Services Authority (FSA).
Now all these regulatory authorities would not let this broker get away with manipulating volatility indices to their advantage. They would promptly suspend the broker from operating in their jurisdictions.
The fact that this has not happened is testimony to the fact that the broker does not manipulate volatility indices.
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.