What Are Synthetic Indices in Forex? Key Differences and How They Work

As a new trader, one of the topics you will hear about in communities and trading forums is synthetic indices. Well, this is one of the many new things you will learn on your journey to becoming a professional trader.

However, even though the term might sound scary, synthetic indices are simple. After you learn what they are and how they work, you will unlock new opportunities. But to start, think of them as simulated markets.

Synthetic Indices 101

You have probably encountered simulation games like Football Manager or Farm Simulator. In these games, you take the role of a football coach or farmer. The same concept applies when it comes to synthetic indices.

With synthetic indices, the prices move like they do in real markets. However, in this case, the prices are regulated by algorithms working within the simulated market. Events happening around the world don’t affect price movements in simulated markets.

Important Considerations and Risks

Trading synthetic indices in forex has its risks. The first thing you must do is select a reputable, well-regulated broker certified by the relevant authorities in your country.

What are synthetic indices in forex, and how do they work? Second, educating yourself is vital. Research well, ask questions, and get started using tips from this source.

Third, you must polish your technical analysis skills. Learning and understanding the specific index’s volatility will give you an edge. You can rake in massive losses if your predictions are wrong when trading synthetic indices with high volatility.

Why Do They Exist? Key Advantages for Traders

This is a question most new traders have. Why not just trade using the real market? Well, below are some of the reasons why synthetic indices are popular in the trading world.

• What Are Synthetic Indices in Forex? Available 24/7/365

The stock market has its opening and closing hours. Forex markets are often closed during the weekend. So, what happens to those traders living in different time zones? Or what happens if you want to trade during the weekend?

Synthetic indices run non-stop. You can trade at any time without worrying about time zones or closed markets.

• Predictable Volatility with Synthetic Indices

Real stock and forex markets are very volatile. Things like hiking tariffs or geopolitical tensions are enough to send the stock market into panic mode. Some win and some lose, but this kind of unpredictability doesn’t happen in synthetic forex markets.

• The Freedom to Focus on Technical Analysis

Synthetic indices are the best when it comes to sharpening your trading skills. With the real forex market, you must stay updated with what’s happening around the world. But with synthetic indices in forex, you can channel your energy into learning how to interpret chart patterns, indicators, and price action.

How Do Synthetic Indices in Forex Work?

As mentioned, synthetic indices are built on the back of algorithms, which shape the overall behavior of the index. Some synthetic indices are designed to mimic the statistical volatility patterns of real markets. However, they won’t fluctuate based on their real-time price.

Forex prices are updated frequently. The mathematical models analyze random numbers and output the next price update. The updates are reflected on your trading platform chart, forming candles and trends just like in a real market.

You can place your trades based on the derivatives offered by your broker. The outcome of your trades depends on the algorithm used by the broker.

Summing up

We are confident that at this point you now understand the answer to the question under consideration: what are synthetic indices in forex? However, we must reiterate that you must find the best broker. Your success depends highly on the performance of their algorithm.

Synthetic indices in forex and stock markets offer something different from real markets. You can use them to fine-tune your technical skills and analysis without the risk related to volatility triggered by world news.