The trading world is growing rapidly, with new instruments and tools being launched to help traders and investors navigate the complex markets. Synthetic indices are one of the latest instruments in trading, built to simulate the behavior and characteristics of real-world markets.
They are the opposite of conventional indices, such as NASDAQ and S&P 500, which are based on real stock prices and companies. Here, we’ll explore synthetic indices, how they work, and why they’re becoming increasingly popular.
Synthetic Indices 101?
As mentioned, synthetic indices mimic the characteristics of traditional markets. They are built using complex algorithms that simulate stock prices. The algorithm generates price movements, volatility, and trends like the real stock market, but they are 100% independent of real-world economic events or corporate performance.
In layman’s terms, think of synthetic indices as a virtual trading environment. They provide investors with a platform where they can practice and execute trades in a controlled setting that closely resembles real markets.
How They Work
Behind the scenes are powerful algorithms that generate random price movements. These algorithms factor in statistics, price changes, and trends from real-world markets to make synthetic indices appear as real as possible.
The main difference between a synthetic index and traditional index is that synthetic indices aren’t affected by external factors like news, war, or weather changes. For example, economic sanctions and wars can trigger drops in stock prices in real-world markets.
Another key difference is that synthetic indices operate 24/7. Because of this, you can trade at any time, regardless of global events or market hours, via platforms like Weltrade.
What Makes Them Popular?
Synthetic indices have become popular recently, especially among new traders. Below are some of the reasons why most investors are choosing synthetic indices.
§ Risk-Free Environment
Trading comes with its fair share of risks. The best investors and traders learn how to mitigate risks. The traditional stock and forex markets can be overwhelming for new traders. Synthetic indices offer a risk-free learning platform for traders to practice their skills without as much risk.
§ Accessibility
The real-world stock market operates on set schedules, which can be an inconvenience for traders living in different time zones. Synthetic indices have no opening or closing hours, allowing traders to trade at whatever time suits them.
In addition, most broker platforms offering synthetic indices allow traders to start with small capital. This makes it easier for beginners to dip their toes into the world of trading without risking large sums of cash.
§ Diverse Trading Portfolio
A diverse portfolio is an investor’s dream. Synthetic indices are available in various forms, simulating different types of markets and assets. You will find everything from stock indices to forex and commodities.
Wrapping Up
If you are new to trading synthetic indices, start by finding a reliable trading platform offering synthetic indices. Take some courses and learn about the basics of trading, plus how to read and analyze charts.
With time, you can build a solid foundation for your trading journey and set yourself up for long-term success.
