Synthetic indices Vs Forex – Which is better for trading?

Whether you’re an experienced trader or just getting started, you’ve probably heard of synthetic indices and forex as investment opportunities. But what is the difference between them? That is the question, right? In this post, we will give you a blueprint of synthetic indices vs forex.

Synthetic indices and forex are two very different types of financial products, but they can be traded on the same platform, which means you’ll need to understand both before you can decide which one you want to trade with.

They’re both important products in their own right but also have some similarities. So, here we’ll discuss some of the key differences and similarities between synthetic indices and forex so that you can better inform your decision about which one to choose.

So, continue reading below to learn more about synthetic indices vs forex.

What are synthetic indices?

Synthetic indices as defined by Deriv are virtual products that are programmed to simulate real-world market movement but with some modifications. These financial products have free liquidity risk and are based on a cryptographically secure random number generator.

Synthetic indices have a constant volatility which is contrary to what is obtainable in other forex markets.

If you are an informed trader, you must know that what causes high volatility in the market is the influence of natural events from a notable company, influencer, or even government, but this is contrary to what is obtainable in the synthetic index market.

For instance, on January 15, 2015, after the Swiss National Bank announced that it would be ending its 1.20 peg to the euro, this currency (euro) experienced a sudden transformation from being a safe haven to a highly hazardous asset, causing the Forex market to collapse. This caused some Forex traders to lose their balances and even some Forex brokers were forced to close.

However, synthetic indices are not affected by such news. It is programmed in such a way that it is affected only by the cryptographic algorithm in which it was programmed, and this makes its volatility fairly constant.

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What is Forex trading?

The forex market is a financial market where one country’s currency is exchanged for another for profit. Due to some fundamental and technical factors, the price of one currency always appreciates or depreciates in value over another, and what forex traders do is leverage these value differences.

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Unlike the synthetic index market, the forex market is affected by fundamental factors. There are many ways in which the forex market differs from the synthetic index, but we will look into that later in this post.

Synthetic indices Vs Forex (Similarities and Differences).

Although synthetic indices and the Forex market are different types of markets, there is a similarity between them. In this section, we will be evaluating the similarities and differences in what is being traded, how the market moves, the amount of capital needed, volatility, and others.

1. volatility -As said earlier, the volatility of synthetic indices remains fairly constant while that of forex fluctuates relatively high. This is because, unlike the synthetic index market, the Forex market is affected by fundamental factors like social news and others.

2. Market Days—The synthetic index market trades 24 hours a day, seven days a week, whereas the forex market can only be traded from Monday to Friday, limiting traders’ trading days.

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3.Spread-Synthetic Indices offer a low spread market, as low as one pip in some cases, while the forex market can have a very high spread when there is high volatility in the market.

4.Tradeable assets: The assets being traded in forex are fundamental countries’ currencies like Euro, pounds, and USD, which are traded based on the relative strength of one currency to another, but in the synthetic indices market, assets like Volatility Indices, Continuous Indices, Step Index, Range Break Indices, Daily Reset Indices, and Crash & Boom Indices, which are programmed virtual assets are being traded.

5.Trading capital: Most trading platforms do not require a minimum deposit when trading synthetic indices, but in the forex market, trading accounts usually require some lots size.

6. As the synthetic index is a simulated market, on an occasion where there is server maintenance, the previous market data may disappear and may no longer be visible on the page.

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Which has higher volatility: forex or indices?

The volatility of forex assets usually ranges from 0.2 to 0.4, but that of synthetic indices is around 0.7, which is double that of forex. As a result, synthetic indexes have greater volatility than forex.

However, though the volatility of synthetic indexes is higher than that of forex, it remains fairly constant, unlike the forex market, in which its volatility can fluctuate over a wide range of values.

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Which has higher leverage: forex or synthetic indices?

The forex market offers greater leverage, which means that even with a small account, you can maximize your profits. However, this can also drain your account easily when the trade is going against your position.

Are synthetic indices easier to trade?

Because the synthetic indices are not affected by fundamental factors, some believe that trading them is easier than forex, as you will only need to apply technical analysis and determine where the market is going.

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Are synthetic indexes manipulated?

The price of synthetic indices can’t be manipulated by a single person or group. Even synthetic index brokers can’t manipulate the price as they have no access to the price before it is generated. Given that the price will be determined at random by the computer system, it is not manipulated.

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Conclusion

With this guide, you must have known that it really depends on what you’re looking to get out of your trading experience. If you’re simply looking to make a quick profit, then forex might be the way to go as it gives you higher leverage. Just remember that the more leverage you use in trading, the easier it is for your capital to liquidate when the market goes against you.

However, if you’re interested in a more long-term investment, then synthetic indices could be a better option. Ultimately, it’s up to you to decide which is best for you.

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