Synthetic indices have gained popularity across the financial markets in recent years because of their attractive features. These instruments, unlike forex or commodities, are traded 24/7 and are independent of market news and even geopolitical events.
However, before you place even a single trade, you need to understand the fundamentals. This starts with gaining a good grasp of pip values. You must endeavor to learn how to calculate pips in synthetic indices, as this is the foundation every serious trader must establish before managing risk and sizing positions.
Understanding a pip in synthetic indices
A pip (percentage in point) refers to the smallest standardized price movement in a trading instrument. When it comes to forex, the concept of pip is quite straightforward; one pip on EUR/USD equals 0.0001.
On the other hand, synthetic indices follow unique pip structures, which vary depending on the index you’re trading. If, for instance, you’re looking at the Volatility 75 Index (V75), which is quoted to two decimal places, one pip equals 0.01, and for the Volatility 10 Index (V10), it may be quoted differently depending on your broker’s platform. Therefore, you should always confirm the decimal structure of the index you’re trading before computing pip values.
A look at the core formula for pip value
When you need to calculate the pip value in synthetic indices, you use the following straightforward formula:
Pip value = (Pip Size x Lot Size) x Contract Size
We can break down this formula with a practical example using the volatility 25 index:
· Pip size: 0.001
· Lot size: 1 standard lot
· Contract size: 1
Pip Value= 0.001x1= $0.001 per pip per movement
Thus, when the index moves 100 pips in your favor, you earn $0.10. If you scale that to 10 lots, the return becomes $1.00 per pip, and from that point, position sizing starts making a real difference.
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Computing pips across various synthetic indices
It becomes critical to understand how to calculate pips on synthetic indices when switching between instruments. This is because each index carries a distinct volatility level and pip structure, as you can see below:
· Volatility 10 Index – This has lower volatility, smaller pip movements, and works best for conservative strategies.
· Volatility 50 Index- Volatility is mid-range, and pip values are also moderate
· Volatility 100 Index- The volatility is high, and even small pip miscalculations can result in significant losses.
· Boom and Crash Indices- These are characterized by spike patterns. Pip calculations for them focus on entry and exit precision around those spikes.
Combining pip calculation and risk management
Mastering how to calculate synthetic indices pips is not just for its own sake; it becomes valuable when you pair it with proper risk management. After knowing your pip value, you can then use it to compute position size based on the percentage of capital you can comfortably risk per trade.
You calculate using the following formula:
Position Size = Risk Amount ÷ (Stop Loss in Pips x Pip Value)
This implies that risking $10 on a trade with a 50-pip stop loss and a pip value of $0.20 means your position size should be 1 lot. This way, your exposure is proportional, and you have protected your account.
Conclusion
Although pip calculation in synthetic indices seems complicated, it’s less intimidating than it appears. You just need to understand the decimal structure of each index and apply the core formula consistently.
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