This type of account works in a similar way to a mutual fund. The reason being, you are essentially investing your cash with a third-party to trade for you. Furthermore, like a mutual fund, your money is banded together with other investors to make a ‘pot’.
Trading this way enables you to get your foot in the door of the global financial markets. All without acquiring any expertise when it comes to trading. It also permits you to trade on a much bigger scale than you might ordinarily be able to. as a byproduct, you can also increase your potential profit on a bigger scale.
With that being said, PAMM and mutual funds are dissimilar in other ways. With a PAMM account, your funds will be entrusted to a single trader who has an accomplished performance history. This is on the contrary to mutual funds, where a large financial institution will be buying and selling on your behalf.
These pro traders make money by means of commission on every profit made. The commission charges will be taken before you or any other investors receive their profits.
As you have no doubt guessed, the investor is the person who injects funds into the PAMM account. If you are the investor, your main objective is to make financial gains passively, without having to do much. This ‘pool’ could include you and 100 other investors.
This type of account might be particularly well suited to you if you are inexperienced when it comes to the forex markets, or if you know what you’re doing but lack the spare hours in a day.
Forex PAMM Trader
Before you can make the most of PAMM accounts, you need to deposit some money to a knowledgable trader. This will be your fund manager. You will be trusting the aforementioned trader with your investment funds and hopefully, they will make profits on your behalf in the forex market.
When the experienced forex trader has collected funds from all investors involved, they have to go through a brokerage company. The brokerage firm must enable traders to offer PAMM services.
When relying on a third-party to take care of your money, it’s crucial that certain safety nets are in place such as a ‘Limited Power of Attorney’ agreement.
How Does a Managed PAMM Account Work?
Before we get into the framework of a PAMM account, let’s have a look at how the investment process works. Managed PAMM accounts are like a far-reaching portfolio, with many investors holding a portion of the investment – as well as sharing the PAMM account manager (trader).
- Let’s imagine you invest $20,000 into your forex PAMM account
- Now let’s say another investor injects $20,000 as well
- Next, the PAMM account trader invests $60,000 from his own pocket.
As you can see from our example above, this particular PAMM portfolio is made up of $100,000 in trading funds. You own 20%, the other investor owns 20% and the PAMM trader owns 60%. As a result of this structure, you will always own 20% of the trader’s account balance.
In another example, let’s assume that in month 1 of trading, your account manager makes a profit totalling 40%, On the $100,000 account used above, this means the profit is $40,000.
The PAMM account manager charged 15% commission, so made gains of $6,000. The leftover $34,000 will be shared out amongst the stakeholders.
- By the end of the first month, the PAMM account value stands at $134,000
- This means that your 20% stake in the account equates to $26,800
- The same goes for the other investor – as they also have a 20% stake
- The PAMM account trader has a 60% stake, which is now worth $80,400
Essentially, by letting a well-seasoned trader buy and sell forex for you, you’ve managed to increase your investment from $20,000 to $26,800 – all without doing a thing.
PAMM Account Procedures
When it comes to PAMM account procedures, the first thing that springs to mind is the Limited Power of Attorney agreement. You will need to sign one of these to confirm your agreement to allow the experienced trader to trade forex on your behalf.
This means that there are no legal consequences if the trader is unfortunate enough to make a loss. The licenced and regulated broker will look after your account balance and monitor the specifics of any trades being placed.
Managed PAMM Accounts End of Month
Let’s look at an example of how you can assess the performance of your managed PAMM account at the end of each month.
- Let’s say the PAMM trader deals currency pairs all the way through the month of July
- Imagine the trader has a profitable month, making gains of 40%
- On a PAMM account initially valued at $200,000, this means it is now valued at $280,000.
- On paper, this means that your first investment of $20,000 has grown by 40%
Nonetheless, as we mentioned, the PAMM trader needs to be rewarded for their profit-making endeavours. As such, they will take their commission on any profits before you or any other stakeholders see any returns.
- The trader made 40% in July which equates to a profit of $80,000
- By deducting 15% commission, the trader will make an extra $12,000
After taking the applicable commission there is $68,000 remaining to share amongst all of the investors of the PAMM account
What if the PAMM Trader has a Losing Month?
In trading, there is no guarantee that the PAMM trader will have a profitable month. So let’s imagine that the trader has had a bad run of results.
- In August the trade makes a 20% loss
- Let us assume that none of the investors withdrew their gains from July, meaning the PAMM portfolio lost 20% of $280,000
- With a loss of $56,000, the account balance sits at $224,000
- Despite your investment in the account being in profit (because it’s higher than the initial $200,000), the trader won’t charge any commission in August.
As is the nature of trading in any market, there is always a chance for the PAMM account manager to experience a bad month.
Moreover, you should avoid withdrawing funds from the account, which is going to work in your favour during a month of losses. The reason being that the value of your account will fluctuate. The same applies when investing in mutual funds, as not every month will be profitable.
PAMM Account Drawdown Percentage
The PAMM account drawdown percentage is an important factor when selecting a provider. The drawdown is the highest percentage in losses that the PAMM traders have undergone, in correlation to the highest value of the trader’s account.
- For instance, let’s imagine that the PAMM account is valued at $100,000 by the end of the first month
- By the end of month 2, the account is worth $120,000
- The peak value of the PAMM account is $120,000 because that’s the most it has been worth so far
- If for example, the third month ends on a high of $90,000, you can calculate this amount in relation to the peak of $120,000
- The maximum drawdown on this metaphorical account is now 25%
Put simply, if in the second month you had invested in the PAMM account, your investment value would be 25% lower by the third month.
The best thing you can do is look for managed PAMM accounts with a low drawdown percentage, ideally over a twelve-month period.
What Does the Broker do?
As previously noted, a forex broker is needed to enable the buy and sell orders of your selected PAMM trader. The brokerage in question also needs to be paid for their services. Because of this, the trader has to pay a variety of commissions and fees.
In light of the fact that you are a stakeholder, these extra costs need to be factored into the trader’s commissions. Namely, it’s not as black and white as simply investing with a knowledgable forex trader and leaving the trader to select any broker they want.
Available Managed PAMM Accounts
In all, there are two ways to utilise PAMM accounts – directly or via a third-party account provider. Let’s explore each option in more detail.
Crucially, you need to spend some time evaluating the results of the trader in question. In addition to this, you need to take a look at what assets they trade.
Upon finding a PAMM trader, you usually agree on a commission framework. At this point, you would need to transfer some money to the PAMM account trader so that they are able to trade on your behalf.
Now onto third-party account providers for PAMMs. Put simply, the provider is the middleman between yourself and the brokerage firm.
In the name of comparison, we’re going to briefly explain how a third party PAMM account provider operates.
- Third-party PAMM accounts offer less flexibility but are great if you want a passive income from trading forex, entirely automated.
- When funding your account via a third-party, there generally won’t be any call for you to select your own PAMM trader. In this instance, you wouldn’t be required to negotiate a commission fee either. The third-party platform in this case usually takes care of everything.
Other Managed Money Systems
When researching managed PAMM accounts, you might have also seen LAMMs and MAMs. Although they sound similar, there are noticeable differences between them.
We’ve put together a brief explanation of each of the forex managed trading systems to highlight the differences. As always, research is key before committing to any type of account.
As you know by now PAMM stands for ‘Percent Allocation Management Module’. If you choose to, you can just allocate a portion of funds to a PAMM, which means you can still copy financial trades from your main account.
Managed PAMM accounts allow traders to use more than one account. This means you can allocate a separate percentage of your capital to every trading system. Of course, this can potentially diversify your portfolio.
The trading structure on PAMM accounts is considered to be attractive to money managers, namely because of the variety of options available. Investors are able to pre-select the trading time frame, rollover time and agree on a commission rate. You can monitor your PAMM trades live.
Last but not least another managed forex account option is a MAM, which stands for ‘Multi-Account Manager’. True to its namesake, MAM enables traders to manage multiple trading accounts on one single platform.
The MAM account, in particular, is considered to be most suited to traders who can tolerate a high amount of risk. The reason for this is that MAM managers can apply higher leverage on specified, segregated accounts.
How to Select a Suitable PAMM Account
From start to finish, one of the most difficult aspects of trading via a PAMM account is selecting the right trustworthy trader for the job.
Likewise, it’s also important to ensure that the PAMM trader in question has the experience, in addition to verifiable results trading in the financial markets.
To assist you in reaching this goal, we’ve put together a list of things to consider on your quest to find the perfect PAMM account manager for you.
The vast majority of PAMM account platforms will require a minimum deposit to get started. In other words, the amount you are investing in the PAMM manager’s trading pot.
Some PAMM platforms stipulate a minimum investment of two or three hundred dollars, whereas occasionally this can be significantly more than that. Regardless of how much the minimum deposit is, you should only ever invest as much as you can realistically afford to lose.
One of the key metrics when looking for managed PAMM accounts is diversification. Using more than one trader immediately improves the diversity of your portfolio.
Let’s say you decide to invest $20,000. Rather than investing in just one PAMM trader, you could invest in five. This means that if one trader is having a month of losses, your portfolio won’t suffer the consequences as much.
Like any seasoned investor, PAMM account traders are looking to make some money. As we talked about earlier, the PAMM trader will make money by means of a commission contract. Bearing in mind that the account manager will only make money when you’re making gains, it’s in their best interest to perform to the best of their ability.
The commission depends highly on the PAMM trader but should reflect the individual’s results, expertise and experience. Put simply, it’s much better to pay 18% commission fees to a successful trader then it is to pay a really low rate and never see any gains.
Before deciding on a suitable PAMM provider, it’s absolutely vital to have a grasp of how the commission framework functions.
Regulated Brokerage Platform
Choosing a regulated brokerage platform is of utmost importance. For example, UK Brokers are legally obliged to obtain a licence from the FCA (Financial Conduct Authority). Other tier-one regulatory bodies include ASIC (Australian Securities and Investments Commission) and CySEC (Cyprus Securities and Exchange Commission).
When it comes to payment options, each site will differ. Either way, in order to begin investing with this kind of account you need to deposit some funds. Most platforms enable typical payment types such as debit/credit cards and bank transfers.
Some PAMM providers offer options such as e-wallets and cryptocurrencies. Always check the terms and conditions as well as the fee table before committing to any one provider.