- Is It Secure?
- Who Can Manage My Forex Account?
- What Are the Main Features of Direct and PAMM Account Management?
- Is It Risky?
According to our experience most traders lose money and we can list ten reasons why account can decrease with each trade. The most important among them are:
Lack of information
Oversupply of analytics
Working on your own
Sometimes it`s difficult even for experienced trader to overcome all these moments and obviously it leads to the losses. In order to avoid such unpleasant moments and not to miss extremely profitable trades, the trading universe offers us such amazing solution as account management, direct and pooled (PAMM) one. So today we will talk about account management and will answer most common questions that may arise. We should say that it seems to be one of the most appealing ways for investors to earn money in financial markets. First, it does not require the skills of independent trading, which means that even beginners or people who are not involved in trading process at all can get good returns. Secondly, in this way, the investor can profit by using the wisdom as well as the abilities and skills of a more professional market participant.
So, let`s have a detailed look at account management.
#1 Is It Secure?
It`s well-known that managed forex accounts are an extremely transparent and secure way of investment, that offers numerous levels of supervision for the account manager and the client. Experienced traders with different degrees of knowledge will propose several types of account management and trading manners in accordance with the size of the capital and the risk tolerance. Investors have an opportunity to estimate a trader/broker with the help of various performance indicators like trading statement, expected profit, and possible risks in order to choose this or that managed fund.
#2 Who Can Manage My Forex Account?
Well, to make it absolutely clear and understandable, your trading account can be managed by a professional trader or by a trading software. Either way, your funds are secure these managed accounts just act as a pool of investments and is traded by the trading pattern in accordance with a set of terms and conditions. You, as investor, are able to select the conditions for manager to follow and minimize or maximize risk according to your current financial goals and priorities. We must emphasize that trader cannot access the investor`s funds due to the fact that trading is executed in accordance with the trading settings which are automatically regulated by the trading platform. But you still need to do your homework and to choose broker/manager wisely.
First, you need to decide whether to cooperate with the brokerage company or with the private trader. If you are eager to invest with the broker, properly asses the company's declared interest rates and do not let the promised fortune obscure common sense. No one, even the most experienced trader, whether a private one or a broker representative, can make fabulous profits in 100% trades. Make sure that the manager or company offers an adequate contract, where the rights and obligations of the parties are prescribed and the maximum amount for the traded position.
If you go for private trader, keep in mind that, as a rule, he is not bound by any formal constraints, and can work with any asset, financial instrument and policy. In fact, the manager simply gets access to your trading account and can use all the opportunities provided to you by the brokerage company. Accordingly, this type of investment implies a higher percentage of profit than investments in ready-made investment products from the broker. This way of account management is actually a perfect solution for investors without emotional discipline needed to counter crazy market situations or pull the trigger once necessitated. In addition, you can quickly contact the manager, establish personal contact with him, discuss all the important moments for you.
#3 What Are the Main Features of Direct and PAMM Account Management?
Direct or personal account management is just what it sounds like – you open a trading account and an expert trader opens/closes positions on your behalf. Manager is trading at his own discretion and you can discuss with him the allowable risk and the maximum amount for each position. Here are the 3 distinguishing features of direct account management:
The investor's funds are on the trading account, which belongs to him. The manager has neither the right nor the ability to perform any other transactions (withdrawal, transfer, etc.) on this account, except trading.
The manager has the right to conduct any trade at his own discretion, and the investor has full access to his account and can monitor all the trades online.
The main way of rewarding the manager is to pay the % of the profit received. As a rule, the amount of commission is discussed in advance and is fixed in the agreement of account management.
The main point here is to agree on the % of the profit that the manager will receive and discuss in advance when and how you will send the commission. It is also important to outline what will be the maximum permissible level of drawdown. Find out what brokerage companies this trader trades through, and vice versa, see if your broker (if any) grants such option as your own trader.
There is only one disadvantage for this type of account is that investor is reluctant to make his portfolio worthy for the trader to spend his time on it. Because of that, there will be a minimal capital requirement over $10,000 since working with smaller deposits will not bring significant profit to the trader.
For example, a trader earns 10% a month, and according to the agreement, the profit from the trades is divided 50/50. In such a way, the account management will bring him $500 a month. You should agree here, the amount is not so impressive for the full-time job, right? If manager agrees to operate such small amounts, it will be only on the condition that all the trades are automatically shown to other investors. Thus, we can assume that trader who gladly agrees to manage the account with less amount is a beginner. It is desirable that the total amount of funds managed by the trader you`ve chosen exceeds $100,000 - $150,000.
There is only one inconvenience of direct account management for investor – transferring performance or any other fee to the manager. Once profit is gained by the trader, the investor has to withdraw from the trading account, wait for the amount to settle on the bank account and only after that transfer the commission to the trader through the payment method agreed. From the manager`s point of view, this way of management may also be problematic. Let`s say he was working the whole month on someone`s account, brought 20% above the starting deposit and this client decides not to send the commission… In our opinion, it`s one of the most unpleasant situations that may occur. Reasonable person will not kill the goose that lays the golden egg, right?
As for the PAMM account management, it`s a bond capital, where several (or a lot of) traders merge their deposits altogether in a segregated account and divide the returns. This way of management is also known as PAMM, LAMM, or even MAM, and each of them bases on the sophisticated program (robot) to allot gains and commission on percentage basis for every participant. This approach is comparably new and provides us with absolutely different stage of scam shield so to say because investors work directly with the brokerage you`ve chosen. Broker designates the professional trader, and you provide them with the Power of Attorney, which authorizes the trader to execute trades on your account. If the performance doesn’t make you happy, you can cancel the agreement at any time. With LAMM software leverage can vary by account too, and MAM one associates the advantages of both concepts.
Here are the requirements for PAMM accounts to be trustworthy:
The manager of the PAMM-account should have a trading statement for a period not less than 1 year. Investing in a PAMM-account that exists for less than 1 year is acceptable only if trader provided confirmed trading history (preferably also on a PAMM-account). Why 1 year? It`s well-known that usually the first half of the year on each account is a period of "acceleration", when the manager has a small capital and practically no investors. That`s why he tries to show as much profit as possible. After six month of profitable trading, investors' funds flock to this account and the amount of funds managed increases significantly. Now manager begins to reduce the risks and profitability on the PAMM account and he gains an additional load on the psychological state - Responsibility for investors' funds plus responsibility for a big volume of managed funds. The next 6 months are needed to cut off those PAMM managers who cannot cope with the psychological factor of managing a "big" account. In addition, it is important that the trader has experience in managing the "big" account, since the trading manner can change as volume increases.
PAMM-accounts should bring, if possible, stable income. That is, if the PAMM account earned 500% last year and 450% out of it was earned in one day, this account doesn`t suit you, since this return is not representative - we cannot be sure that it will be repeated. Of course, we should say that with this service your account can and will be charged the “performance fees” which can vary drastically, according to the type and risk profile of the selected account. The scope may be as great as 10-35% and higher. Some managers may also require a management fee which is fixed and prescribed in the Agreement.
The main advantages of PAMM system before direct account management are low minimum entrance for investment and trader's share in total capital. And at the same time, none of the parties need not directly engage with representatives of the other two parties at all, since all processes are automated - which is extremely convenient and very modern. You should also check for the “Lock Up” conditions (if any) and see if withdrawals are sent once requested or only when the current month is over so all the trades are closed. Sometimes these necessitated suspensions are vital for the trader to close the positions in a sufficient manner. Some termination fees may apply in case if you decide to withdraw all the money from your account and quit. One way or another, you are working through your broker in a translucent way, but still, read thoroughly the rules of the account before rushing into it.
#4 Is It Risky?
If you are looking for a trading approach that is not risky at all, then drop the idea, trading is not for you. Remember, no matter what you trade, no matter how you trade – risk is always there. Even investing in a managed account with a trader who has been closing only profitable trades during last 5 years, one cannot guarantee that the next year will also be successful for him and the investment will bring the investor a 100% profit. You have to be prepared that the trader can lose money, so you have to follow the same rules as for any investments – not to risk all money and not to invest all money in only one manager. The best way to minimize risks is to create an investment portfolio. In this case, the investment will be more secure, since if one trader loses, the profit brought by other traders will cover that. Having a forex managed account can be really beneficial way to take advantage of in this very unpredictable market. With professional traders managed accounts do provide us with the opportunity to gain stable profits on the market without years of experience and the necessity to be a pro. Nevertheless, traders must always do their own research before rushing into managed accounts, since opening managed account doesn`t guarantee you tremendous profits in each and every trade.