Synthetic Indices Vs Forex Currency Trading 🍱

As a trader with experience in both synthetic indices and forex markets since 2016, I've had the opportunity to explore and understand the unique characteristics of each asset class. In this post, I'll draw on my personal experience to highlight the similarities and differences between synthetic indices and forex trading, providing a comprehensive overview that can help both new and seasoned traders make informed decisions.

Difference Between Forex and Synthetic Indices

Some of the significant differences between synthetic indices vs currency pairs are:

Underlying Assets & Cause Of Price Movement:

• Synthetic Indices:
  Synthetic indices operate as artificial markets controlled by algorithms that generate random numbers. These indices are unaffected by fundamental events such as geopolitical conflicts or economic crises.
  
  The algorithms are specifically designed to create different types of price movements for various indices, such as the distinct behaviours observed between the Volatility 75 and Boom and Crash indices.
  

• Forex Trading:
  In contrast, forex pairs fluctuate based on the real-world strength of currencies, which is influenced by fundamental factors like geopolitical events, economic data, and monetary policies.
  
  Unlike synthetic indices, forex markets are directly impacted by these external factors, leading to price movements that reflect real-world economic conditions and market sentiment.

Volatility:

• Synthetic Indices:
  Synthetic indices exhibit consistent volatility throughout the year, with each index maintaining a uniform rate of price change at any given moment.
  
  Certain synthetic indices, such as V100 (1s) and V75, are particularly volatile, experiencing significant price swings over short periods. This high volatility can present profitable opportunities for traders using short-term strategies like scalping. In contrast, such dramatic price changes over brief intervals are less common in forex trading.
  

• Forex:
  In forex trading, volatility—the rate of price change—can fluctuate throughout the week due to various factors. For instance, the US dollar often experiences increased volatility around the release of the nonfarm payroll (NFP) report each month.
  
  Additionally, forex markets typically show lower volatility at the beginning and end of the week, with volatility usually peaking in the middle of the week. This pattern can make trading more challenging at other times, requiring traders to identify the optimal moments for their trades.

Availability/Trading Times

• Synthetic Indices:
  synthetic indices are accessible around the clock, seven days a week, 365 days a year. This continuous availability allows for trading at any time and on any day, with consistent volatility.
  
  The constant access and uniform volatility of synthetic indices provide significant convenience for traders, enabling them to engage in trading activities without the constraints of conventional market hours.
  
• Forex:
  Forex currency markets operate 24 hours a day, five days a week, from Monday to Friday, aligning with the open hours of global financial centres.
  
  Trading is paused on weekends and major holidays, such as Christmas, reflecting the industry's adherence to traditional market closures.

Regulation:

• Synthetic Indices:
  Regulation varies by jurisdiction, with some regions treating synthetic indices differently from traditional financial instruments. In other regions, synthetic indices are not available for trading
  
• Forex:
  Forex trading is regulated globally, with oversight by financial authorities in each jurisdiction to ensure fair trading practices and investor protection.

Trade Volume

As of 2019, the forex market has a daily volume of US$6.6 trillion. Synthetic indices have a far smaller daily trade volume.

Similarities Between Synthetic Indices and Forex Currency Pairs

1. Accessibility: Both synthetic indices and forex trading are accessible to retail traders with relatively low capital requirements. They operate online, allowing traders from around the world to participate.
   
2. Leverage: Both markets offer leverage, enabling traders to control larger positions with a smaller initial investment. This amplifies both potential profits and risks.
   
3. Market Hours: Synthetic indices and forex markets operate 24 hours a day, five days a week, providing ample opportunities for trading regardless of time zone.
   
4. Technical Analysis: Traders in both markets rely heavily on technical analysis to identify trends, patterns, and entry/exit points.
   
   
   
   
   
   
   
5. CopyTrading: You can copy the trades of profitable traders in both asset classes.
   
6. Price Measurement: In both synthetic indices and forex trading, price changes are measured in pips, allowing for a standardized way to track movements.
   
7. Trading Strategies: Both markets can be traded using price action strategies, where traders analyze price movements and patterns to make decisions.
   
8. Binary Options: Both synthetic indices and forex offer trading opportunities through binary options, allowing traders to speculate on price movements with fixed returns.
   
9. Contracts for Difference (CFDs): Both types of assets are available for trading as Contracts for Difference (CFDs), providing a way to trade on price movements without owning the underlying asset.
   
   
   
   
   
   
10. Leverage: Both markets offer leverage, enabling traders to control larger positions with a smaller amount of capital, thereby amplifying potential returns and risks.
    
11. Demo Accounts: Traders can practice and refine their strategies in both synthetic indices and forex markets using demo accounts, which simulate real trading conditions without financial risk.
    
12. Automated Trading: Both markets support the use of trading bots, allowing for automated trading strategies that can execute trades based on pre-set conditions.
    

Which Market Should I Trade? Synthetic Indices Vs Forex

Choosing between trading synthetic indices or forex depends on your trading goals, preferences, and experience. Here’s a guide to help you decide which market might be best for you:

Consider Trading Synthetic Indices If:

1. You Prefer Consistent Volatility: Synthetic indices offer uniform volatility, which can be advantageous if you prefer a predictable trading environment with consistent price movements.
   
2. You Want 24/7 Trading: If you need flexibility and the ability to trade at any time of the day or night, synthetic indices are available around the clock, including weekends and holidays. However, you should be wary of overtrading
   
3. You Are Interested in Short-Term Strategies: High volatility in certain synthetic indices, such as V100 (1s) and V75, can be ideal for short-term trading strategies like scalping.
   
4. You Want to Avoid Fundamental Analysis: Synthetic indices are driven by algorithms rather than real-world economic factors, so you can focus more on technical analysis and price patterns.
   
5. You Are Looking for Simplicity: With less impact from external economic events, synthetic indices can offer a more straightforward trading experience.

Consider Trading Forex If:

1. You Are Interested in Economic and Geopolitical Factors: Forex trading involves currency pairs influenced by real-world economic data, geopolitical events, and central bank policies. If you enjoy analyzing these factors, forex might be more suited to you.
   
2. You Prefer a Market with Established Regulation: Forex markets are well-regulated globally, which provides a higher level of protection and transparency compared to some synthetic indices markets.
   
3. You Are Ready for Variable Volatility: Forex markets can experience significant volatility due to economic announcements and geopolitical events. If you can manage this variability and adjust your strategies accordingly, forex trading could be a good fit.
   
4. You Want to Trade During Specific Market Hours: Forex trading follows the schedule of global financial centers, with peak activity typically in the middle of the week. If you prefer trading during specific market hours, forex provides a structured trading schedule.
   
5. You Are Comfortable with Both Technical and Fundamental Analysis: Forex trading often requires a blend of technical and fundamental analysis. If you are prepared to incorporate both into your trading approach, forex may be more suitable.

Ultimately, the best choice depends on your individual trading style, risk tolerance, and goals. It might also be helpful to experiment with both markets using demo accounts to gain experience and see which one aligns better with your trading preferences.

What Are Synthetics In Forex

In forex trading, the term “synthetic indices” refers to financial instruments that are created to replicate the behavior of real-world markets but are not actual currencies or traditional assets.
However, if you're looking for examples of synthetic or engineered instruments in the context of forex, here are some types of synthetic assets:

1. Currency Indexes: These are composite indices that measure the performance of a basket of currencies against a base currency. Examples include the US Dollar Index (DXY), which tracks the value of the US dollar against a basket of major currencies.
   
2. Synthetic Currency Pairs: These are currency pairs created by combining different real-world currency pairs to form a synthetic asset. For example, a synthetic pair might be created by combining EUR/USD and USD/JPY to form an indirect relationship between EUR and JPY.
   
3. Volatility Indices: While not traditional forex instruments, volatility indices like those offered by Deriv, such as Volatility 75 (V75), are synthetic assets that mimic the behaviour of real-world market volatility. They are designed to offer trading opportunities based on the volatility of price movements.
   
4. Synthetic ETFs: Some brokers offer exchange-traded funds (ETFs) that are engineered to track the performance of a basket of assets, including currencies, but are not direct currency pairs themselves.

These synthetic assets provide traders with various ways to engage with currency markets and related volatility, offering opportunities that might not be available through traditional forex pairs alone.

FAQs On Forex vs Synthetic Indices