Many investors are now leaning towards trading synthetic indices because they offer 24/7 market access and predictable volatility patterns. Synthetic indices are generated using proprietary algorithms that simulate real market movement.
Accordingly, understanding how to calculate pips in synthetic indices is a crucial skill that every trader must master. Pips will help you measure price movement, assisting you in calculating profits, losses, stop-loss levels, and risk exposure.
In this guide, you will learn what pips are, how pip values are determined in synthetic indices, and how traders calculate pip movement accurately.
What Are Pips in Synthetic Indices Trading?
A pip is a unit used by traders to measure price movements in the trading market. When trading synthetic indices, pips help traders determine the market’s movement and calculate potential profits or losses on a trade.
Learning how pips work and how to calculate them forms the core basis of trade analysis, risk management, and position sizing.
Synthetic indices often have different decimal formats than traditional trading instruments, such as forex. What this means is that the value of a pip in synthetic trading can vary depending on the index you are trading.
For instance, if a Volatility 75 index on Syntxwiki moves from 3200.20 to 3201.20, the market has moved 1.00 point, which many traders may refer to as 100 pips depending on the broker’s pricing format.
Step-by-Step Guide to Calculating Pips Manually
Knowing how to calculate synthetic indices pips is a crucial skill that will help you measure price movement, profits, and losses accurately. The good thing is that many trading platforms calculate this automatically. However, knowing the manual process can give you better control over your trades.
§ Identify Your Entry Price and Exit Price
The first step when calculating pips in synthetic indices is to identify your entry and exit prices. Using our earlier example, if you buy the Volatility 75 index at 3200.20 and close the trade at 3215.20, the market has moved upward by 15.00 points.
Next, determine the pip format used by your synthetic index. In most instances, it is a decimal-based format, with the last digit or decimal place representing the pip movement. So, in our cases, if the index measures pips to two decimal places, our multiplier will be 100.
Pips = (Exit Price − Entry Price) x Multiplier
(3215.20 − 3200.20) x 100 = 1500 pips
How Lot Size Affects Pip Value and Profit
As part of learning how to calculate pips in synthetic indices, you must also understand how lot size affects value and profit. A pip shows the price change, but the lot size determines the financial value of that movement.
Larger lot sizes increase the value of each pip, meaning profits can grow faster when the market moves in your favor. However, the same also applies if the market moves against you; your losses will become larger.
Many beginner traders often ignore the impact of lot size when calculating how much each pip is worth before entering a trade. Understanding the relationship between lot size and pip value is essential for proper risk management.