Guide to understanding Volatility Indices: A beginner-friendly overview

Ever wondered why traditional financial markets go up and down so much? It's often because of news and events happening around the world. However, with Deriv's Volatility Indices, you can trade based on volatility itself, independent of real-world occurrences.

What are Volatility Indices?

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Volatility indices are synthetic instruments that simulate asset price fluctuations at set volatility levels, providing smooth, continuous price movements tailored to each index’s volatility.

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At Deriv, a random number generator ensures these price changes adhere to fixed volatility levels, enabling traders to focus on price dynamics within a stable, controlled setting.

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Let's dive in and uncover exactly what these different Volatility Indices are and how you can navigate this simulated market.

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Volatility Indices trading: Exploring different volatility levels

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Deriv offers various Volatility Indices, each identified by its volatility levels ranging from 10 to 250. Each index features a "tick frequency," representing the rhythm of price changes:

• One-second ticks (1s): Smaller, more frequent price changes.
• Two-second ticks: Larger price changes that occur less frequently.

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The choice depends on your trading style; one-second ticks cater to those seeking quick actions, while two-second ticks suit those who prefer a slower pace.

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It is important to note that even if two indices share the same volatility number (such as Volatility 10 (1s) and Volatility 10), their prices do not necessarily move in tandem. Each index operates independently and can exhibit distinct price movements.

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Why trade Volatility Indices? A trader's perspective

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Volatility Indices provide a unique asset class that allows traders to focus on market movements without the influence of daily news and economic shifts. Here are the key reasons to consider trading them:

1. 24/7 availability: Volatility Indices can be traded at any time, day or night, providing flexibility regardless of your schedule.
2. Level playing field: These indices are not influenced by real-world events, reducing the risk of manipulation by large players and creating a fair trading environment.
3. Predictable costs: Volatility Indices feature fixed differences between buy and sell prices (spreads), making trading costs predictable and allowing for easier trade management.
4. Varied risk levels: Deriv offers Volatility Indices across a spectrum of risk, from Volatility 10 (less movement) to Volatility 250 (more dynamic), allowing you to tailor your trading strategy based on your risk tolerance.

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Trading your Volatility Indices strategy

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It's time to explore the tools and platforms that will help you make the most of trading on Deriv. Think of it like choosing the right gear for an adventure: you need to know what's out there so you can pick the tools that fit your style. There are two main methods for trading:

• Contracts for Difference (CFDs): This is like predicting whether the price will go up or down. You don't actually own the index, you're just speculating on its movements. CFDs can be great for short-term trades, and you can even use something called "leverage" to amp up your potential profits, but it’s important to note that whilst leverage can enhance potential profits, it also increases risk and potential losses.
• Options: Options let you speculate on price movements without risking more than your initial stake. You also have different types of options to choose from, each with its own risk and reward profile, providing flexibility in your trading strategies.

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Your choice between CFDs and options depends on your risk tolerance and trading goals:

• Payouts: CFD payouts are straightforward – you win or lose based on the price change, whereas options provide more flexible payout structures.
• Time: CFDs can be held for as long as you want, while options sometimes have an expiration date.
• Margin: Margin in trading differs between options and CFDs. Options need an upfront stake but no ongoing margin, whereas CFDs require continuous margin and may incur overnight financing costs.

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Deriv offers different platforms for trading CFDs and options:

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CFD Platforms:

• Deriv MT5: This is your playground if you're a data geek who loves charts and technical analysis. It's got all the bells and whistles for seasoned traders.
• Deriv cTrader: This one's perfect for beginners and those who like a simple, clean interface. It also has a cool feature called "copy trading" where you can automatically follow the moves of experienced traders.
• Deriv X: Love to customize? This platform lets you create your own trading dashboard with the tools and info you need.

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Options:

• Deriv Trader: Simple and straightforward – perfect for getting started with options.
• Smart Trader: This one holds your hand and walks you through the process of choosing and placing options trades, ideal if you're feeling a little unsure.
• Deriv Bot: This is where the fun of automation comes in. You set the rules, and the bot does the trading for you.
• Deriv GO: Got a busy lifestyle? This app lets you trade on your phone wherever you are, perfect for traders on the go.

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There is no right or wrong trade type or platform; it's all about finding the one that fits your style and goals.

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Curious to learn more about Volatility Indices?

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Whether you’re seeking high or low volatility, these indices provide the flexibility to meet your trading goals. 

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Learn more about the Volatility Indices by signing up for this free course or practice your skills with a free demo trading account and start exploring Deriv's Volatility Indices across its various platforms today.