Synthetic indices are financial instruments that simulate the movements of real-world markets, but are not tied to any actual underlying assets like stocks, currencies, or commodities. Instead, their price movements are generated by a computer algorithm using a cryptographically secure random number generator. Think of them as a simulated market that behaves like a real one but is completely independent of global events, news, or market hours.
How Are They Created and What Moves Their Prices?
The core of a synthetic index is a sophisticated algorithm that creates price movements. Here’s a simple breakdown:
- Random Number Generation: A secure and auditable random number generator produces a series of numbers.
- Algorithmic Translation: These numbers are then fed into a mathematical model that translates them into the price charts you see on a trading platform. This process creates realistic market behaviors, including trends, volatility, and price action.
Because they are algorithmically generated, the “prices” of synthetic indices are moved by the mathematical model itself, not by supply and demand, economic news, or political events. This creates a trading environment that is free from the unpredictability of real-world occurrences.
Characteristics of Synthetic Indices
Several unique features distinguish synthetic indices from traditional markets:
- 24/7/365 Availability: Since they aren’t tied to real-world market hours, you can trade synthetic indices around the clock, including weekends and holidays.
- Immunity to Real-World Events: Economic data releases, political instability, or a CEO’s controversial tweet will have no effect on the price movements of synthetic indices.
- Controlled Volatility: Brokers can offer different types of synthetic indices with predefined and consistent levels of volatility. For example, some indices are designed to be highly volatile, while others have much calmer price movements.
- No Slippage: Because the liquidity is technically unlimited (as it’s generated by the broker), trades are often executed at the exact price you see, without the “slippage” that can occur in real markets during times of high volatility.
Common Types of Synthetic Indices
Brokers that offer synthetic indices typically provide a variety to suit different trading styles:
- Volatility Indices: These are some of the most popular synthetic indices. They come with varying levels of constant volatility (e.g., Volatility 10 & 10 (1s), Volatility 15 (1s), Volatility 25 & 25 (1s), Volatility 30 (1s), Volatility 50 & 50 (1s), Volatility 75 & 75 (1s), Volatility 90 (1s), Volatility 100 & 100 (1s), Volatility 150 (1s), Volatility 250 (1s). The higher the number, the more volatile the index.
- Crash/Boom Indices: These indices are characterized by long periods of steady price movement followed by sudden, sharp spikes (Boom) or drops (Crash).
- Step Indices: These indices move with a fixed step size in one direction for a period before changing, making them appear like a staircase on a chart.
- Range Break Indices: These are designed to trade within a certain price range for a period before breaking out.
- Drift Switching Indices: These instruments shift between bullish, bearish, or side-ways trends. Ideal for smart buys, strategic sells, and timely pauses.
- Jump Indices: Expect prices to leap every 20 minutes (on average), with an equal chance of soaring or plunging around 30x the normal volatility of the index from 10%, 25%, 50%, 75%, and 100% volatility.
- Dex Indices: Expect dramatic spikes and drops every 10, 15, or 25 minutes (on average) with smaller fluctuations in between.
In essence, synthetic indices offer a unique and controlled trading environment that allows traders to focus purely on their trading strategies without the influence of external factors.
What Strategies Work on Synthetic Indices?
While some traders rely on Supply and Demand zones, others prefer breakout Channels, and many swear by technical indicators—even in Synthetic Indices where no order book exists. The real edge comes from finding the approach that fits you, then rigorously backtesting it until you’ve proven its consistency. Only once you’re confident in its performance should you step into the live market.
How to Backtest Strategies on Synthetic Indices?
For Backtesting manual strategies on Synthetic Indices I use the following Tool which is designed for Metatrader 5-https://www.mql5.com/en/market/product/25963?source=Site+Market+MT5+Search+Rating006%3aexp5+tester
This tool allows me to replay the market on the strategy tester and I can easily utilize this tool on a demo account and test strategies executing Buys and Sells and pending orders as if it were the live market. This allows me to fine tune and see where i would have went wrong and improve.
Brokers Offering Synthetic Indices
These are the brokers I currently use for trading Synthetic Indices
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