What Are Synthetic Indices in Forex? Definitions and Differences

Is there such a thing as synthetic indices in forex? No, they are two different trading instruments. As a beginner trader, this may seem confusing at first. However, once you learn how both markets work, you will be able to choose the best instrument for your portfolio.

In this guide, we will introduce both trading instruments. Additionally, we will discuss major differences between the two.

What Are Synthetic Indices?

Synthetic indices are a special class of trading instruments. They are generated using algorithms, random number generators, and mathematical models. Something else worth noting: the value of synthetic indices isn’t tied to an actual product.

Every characteristic that synthetic indices exhibit is determined by the algorithm. As a result, geopolitics, inflation reports, or monetary policies don’t have any impact on the prices of synthetic indices.

What Are Synthetic Indices in Forex?

There is no such thing as synthetic indices in forex. Forex is one of the most popular markets and instruments. Unlike synthetic indices, forex is pegged to currency prices across the world. As a result, the forex market is affected by what’s going on in the world.

For example, new monetary reports from the Federal Reserve can have an impact on the US dollar in the forex market.

Trading Synthetic Indices

Almost all online brokers offer access to forex. However, synthetic indices aren’t as popular yet. Moreover, synthetic indices aren’t available on every online brokerage platform.

To start trading synthetic indices, first confirm whether the broker offers them. Understand that the synthetic indices offered by one broker may be different from those offered by another. So, as part of your research, make sure that you read the indices’ specifications.

Also, we recommend using Syntxwiki and a demo account to learn and practice first before you start trading synthetic indices live.

Key Differences Between Synthetic Indices and Forex

§  Underlying Assets

Synthetic indices are not pegged to any real-world asset. They are generated using proprietary algorithms and mathematical models. Forex, on the other hand, involves exchanging national currencies.

§  Trading Hours

Here, synthetic indices take the win. The synthetic market is available 24/7/365, including weekends and holidays. This year-round operation offers traders more flexibility and market access.

The forex market runs 24/5 from Monday through Friday. The trading sessions are split into four major windows. However, not every session provides equal trading opportunities. As a result, traders must ensure they get their timing right.

§  Liquidity

For synthetic indices, liquidity depends on the broker. Forex operates on a decentralized network that includes different players, from retail traders to banks and hedge funds. This global network of investors provides massive liquidity.

§  Market Analysis

Since synthetic indices are immune to what’s occurring around the world, traders only use technical analysis to identify trends and entry points. In forex trading, you must rely on both technical and fundamental analysis.

Summing Up

What are synthetic indices in forex? Synthetic indices are an alternative to conventional trading instruments such as forex, stocks, and commodities. However, they are not another form of forex. Their pricing mechanisms differ, and market analysis may not apply in the same way.