Interested in trading foreign currency exchange markets, but don’t have the time or know-how to trade forex? Forex PAMM accounts may be a good choice for you.
What Is a PAMM Account?
Percentage allocation management module, also known as percentage allocation money management or PAMM, is a form of pooled money forex trading. An investor gets to allocate their money in desired proportion to the qualified trader(s)/money manager(s) of their choice. These traders/managers may manage multiple forex trading accounts using their own capital and such pooled moneys, with an aim to generate profits.
PAMM stands for a percent allocation management module. It is a software application generally used for pairing client funds with a special discretionary account service provided by foreign exchange brokers. The manager’s trading activity results – including profits, losses and trades – are compounded among central asset accounts accordingly to the ratio of investment on an account. As the currency dealing and other types of arbitrage operations attain profit-making capacity within very straitened margins, this type of management enables more currency to be engaged in trading while the risk is distributed usually between investors.
The role of forex broker is to:
- Provide a secure, reliable platform that allows money managers and investors to interact
- Facilitate the trading activities of money managers within the realms of allowed regulations
- Facilitate the account keeping, deposits, withdrawal, and related activities
- Apart from a usual trading business platform, allow transparent review, feedback, rating, and related mechanisms for investors and money managers to select and interact with each other
The participants in the PAMM Account setup:
- Forex broker/ forex brokerage firm
- Trader(s)/ money manager(s)
- Investor(s)
How do investors’ select money managers?
Brokerage firms offer numerous way for investors to make an informed choice, including detailed CVs, qualifications, past performances in terms of returns, amount of money managed, numbers of associated investors, positive/negative reviews, etc. about their traders/ money managers. In addition, there are outside rating systems. Here is a screenshot from Alpari’s PAMM account rating system:
Investors
- Usually, the investors have no choice of forex trading assets, except for those offered by the money manager.
- They carry the risk of losing their capital due to trading activities of money managers, but also enjoy the potential of returns if the manager performs well.
Money Managers
- Have access to the money only in their pool. They cannot pull money from investor’s trading accounts. For example, Paul may have a total of $9,000 in his forex trading account, but since he has allocated only $4,000 to Marcus, Marcus cannot trade beyond that $4,000
- Can set a minimum and a maximum amount criteria for investors
- Can accept or deny new investors as they wish
How can users benefit from using PAMM Accounts?
Using the PAMM Account as a means of pooling money into trading, the account manager can trade with larger volumes and therefore has the chance of receiving larger returns. Investors place funds in the manager’s account and the manager’s positive trading outcomes are reflected in the PAMM Account rating which, in turn, serves as an advertisement for the PAMM Account. The manager trades, generating profits which attract further investment and a larger amount of funds is traded on behalf of investors.
The participants of the PAMM Account structure include: the broker who provides the service, traders (or money managers) and investors. So, investors who want to profit from trading but lack the time or skill to do so need not trade independently; having only to invest funds in PAMM Accounts. So then, PAMM Accounts mean entrusting funds to managers. The managers are experienced and professional traders who manage others people’s money along with their own capital.
The agreement between the manager and investors is outlined in the Manager’s Proposal and is the basis for investor consent to take on a risk by making their money available to selected managers who will dispose of the funds according to their own skills and strategy. Furthermore, the agreement sets the size of the charge for the service manager provides. It may be a definite sum of money or a percentage.
The work with the account starts with its opening and the initial investment is the manager’s capital: a non-withdrawable amount which secures the manager’s interest in the account. The manager is not permitted to remove this capital as it serves as an assurance for prospective investors that the account will be operated responsibly. The managers advertise the account’s activity, offering certain conditions and indicating profits received. As such, the brokers advertise the account in ratings on their websites, but they do not bear responsibility for any losses or profits as they are not involved in any trading activity.
Profits are then distributed at the end of each trading period between the manager and the investors. At the same time the broker may distribute funds, acting as a regulator where manager’s act unfairly.
PAMM Accounts offer a lot of advantages to managers as well as to investors. If you are a successful trader acting as a manager, you receive profit not only from your own funds but also a percentage of the investor’s profit and you can set this amount in the Manger’s Proposal. The managers define the conditions, control degree over the trade terms, trade period and the distribution way of profits. These are the conditions that the investors must agree to.
For the investors the advantages are no less. The first benefit is the trading professionalism of effective managers. Additionally, there is a possibility to withdraw money from PAMM Accounts at any moment where investors are unsatisfied by the results and the manager’s trading style. To reduce risk, the investor can diversify their investments across a number of accounts.
How to determine if a PAMM Account is worth investing in
Interest in investing is growing and people are getting more and more knowledge about professional trading. However, their experience is not enough to conduct the investment themselves. Thus, PAMM Accounts are very popular. The choice of traders is the most significant point as the manager is the person whom you entrust to manage your capital.
There is some significant PAMM Account data that should be paid attention to when choosing the manager to manage your funds.
The first thing to analyze is the account opening date. From the graphs you can appreciate the length of the trader’s work on the account, the account balance, the general growth, the consistency and their experience.
Operating income is the second significant thing for inexperienced investors. The success rate of traders is an extremely temporary attribute so if profits were 200% last month, they may just be 20% or less this month. Here you should appraise this steadiness over diverse intervals. Another factor you should bear in mind is the first value as it is easy thing to manipulate.
Another thing is manager remuneration. The most skilled traders can increase or multiply the minimal capital investment.
Pay attention to the aggressiveness trading which is the amount of risk managers take. Take a look at the number of deals and the amount of trading per day.
The deposit amount is the money amount under risk; it is the maximum trader deposit percentage used for trading. If trader’s deposit is 50% or above, it generally means they are a high risk trader.
Recovery factor highlights a trader’s ability to restore losses after fall and overcome the tension and potential fiasco. It is indicator of trader’s success rate.
Manager’s own capital. The trader with the big personal account is considered to be careful and responsible as he risks his own money as well.
The total equity of all accounts indicates the level of funds being managed and this gives reason to trust such trader.
The type of investment needs to be studied carefully. There can be two types: short-term and long-term investment. Long-term investment or scalping investment comes more recommended. It takes more time but can give a good potential profit.
Keep in mind all of these points when making your choice for an appropriate PAMM Account. Sometimes some websites show the lists of the best and selected PAMM traders. Don’t rush when choosing PAMM Account; instead weigh up all the data. Choose the trader who works in a stable and profitable fashion.
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