Synthetic indices and forex are popular trading instruments. However, they work differently. For traders interested in investing in either, understanding the basics is key.
While forex is more popular, there are still plenty of learning resources about synthetic indices. In this guide, we cover synthetic indices vs forex, highlighting how each trading instrument works and the major areas where they differ.
Real Market vs Algorithmically Generated Market
The biggest difference between synthetic indices and forex lies in the underlying market and how price movements are generated.
Forex prices are produced by a global network of market participants. These include various top financial institutions and retail traders. Synthetic indices, on the other hand, are generated using proprietary mathematical models and random number generators.
Based on this information, forex trading requires both technical and fundamental analysis. For synthetic indices, you only need technical analysis, since market prices are immune to what’s happening around the world.
Trading Hours for Forex vs Synthetic Indices
The second biggest difference between forex and synthetic indices is in trading or market hours.
Forex operates around the global financial system. It is available 24 hours a day during the trading week, before the market closes for the weekend. Synthetic indices are available 24 hours a day, all week from January through December, depending on the broker.
This 24/7, all-year-round availability makes synthetic indices more attractive to traders who want access to markets outside traditional forex trading hours.
Volatility
When looking at synthetic indices vs forex, volatility is one factor that will often pop up. As you know, volatility tracks the size and speed of price movements in trading instruments.
In forex, volatility often changes according to market conditions. Various factors such as economic announcements, central bank decisions, and geopolitical events can produce sharp price movements.
Synthetic indices are immune to what goes on in the real world. However, each synthetic index on this website is designed around particular volatility characteristics. Some synthetic indices experience steady price changes, while others are designed to showcase massive and frequent movements.
Liquidity When Trading Synthetic Indices vs Currency Pairs
Liquidity is also different in synthetic and forex markets. Major currency pairs have extremely high liquidity. High liquidity often leads to tighter spreads and better trading conditions for forex traders.
In synthetic markets, liquidity depends on the execution conditions provided by the broker. As a result, it is important to understand the broker’s trading conditions if you are interested in trading synthetic indices.
Risk Management
Both synthetic indices and forex involve risks. However, what matters is how you evaluate the markets and position yourself.
The approach to managing risk in both is almost the same. For beginners, your risk management plan should include using appropriate position sizes and setting stop-loss levels where appropriate.
How you approach risk management should depend on your experience, account size, strategy, and financial circumstances.
Final Thoughts
When comparing synthetic indices vs forex, the goal should not exclusively be determining which offers more profit. Instead, take time to understand how each market works. Next, practice with a demo account, develop a clear trading plan, and establish risk management rules.
