Typically, to earn profits from trading in the Forex market, one must acquire expertise in areas such as technical analysis, trend analysis, price action, and trading psychology, as well as gain a thorough understanding of trading principles. Nonetheless, those who are unfamiliar with these concepts may opt for Forex-managed accounts. This approach involves depositing funds into an account and entrusting another individual to handle the buying and selling while receiving a commission in exchange. The subsequent discussion will delve deeper into the subject of Forex management accounts.
What are Forex Managed accounts?
Due to its constant changes and severe price fluctuations, the Forex market can quickly deplete a trading account if one is unaware of news or economic information. That’s why having an essential understanding of how Forex works is crucial for individuals who plan to trade in this market. A person who owns an account and possesses a good understanding of the market can execute profitable trades and achieve significant success.
Some people may not be able to manage their Forex accounts and generate profits due to their lack of familiarity with the market or insufficient time. In such cases, they can delegate the task of managing their accounts and making trades to another person. It is crucial to select a capable manager for Forex management accounts since if the chosen person lacks adequate experience in the Forex market, you risk losing your money swiftly and incurring substantial losses.
Typically, this account is categorized into two divisions: one where profits are shared between the account owner and the manager, and the other where profits are distributed among the account owner, manager, and brokerage, known as a PAMM account. Additionally, there exists a managed account type called a MAM account, where a single person oversees multiple accounts simultaneously and trades in them.
By entrusting someone else with the management of your account, they use their trading strategies and experience to determine the precise entry and exit points. This approach allows inexperienced individuals in the Forex market to earn substantial profits.
How do Forex Managed accounts work?
By entrusting your Forex account to a professional Forex trader in account management, you enable them to carry out profitable trades on your behalf. Typically, these traders cannot deposit or withdraw funds, and they execute trades on your behalf with a limited power of attorney or LPOA.
Through this agreement, the account manager is authorized to execute trades transparently. You retain full control of your account during this time and can deposit or withdraw funds whenever you choose. Additionally, you can closely scrutinize all trades. At any point, you may cancel the Forex account management services.
Various types of Forex Managed Accounts
Managed accounts, or PAMM accounts, are classified based on various factors. One of these categories is based on the type of trading, which we will discuss in more detail below.
Manual Accounts
In manual accounts, an experienced and reputable manager executes trades on your behalf. Essentially, you leverage their expertise to make profits. This allows you to build an investment portfolio with various Forex strategies without any knowledge or expertise. That’s why it’s called a manual account, which is done without artificial intelligence intervention and complete control of the account is in the hands of a human.
Automatic accounts
All tasks are carried out using mathematical algorithms and artificial intelligence in this approach. Thus, human emotions do not play a role, and market entry and exit are determined by analyzing past and present trends. The name given to this artificial intelligence is a trading robot or EA (Expert Advisor).
These robots are capable of quickly examining all parameters and selecting the optimal trading time by integrating algorithms and trading rules, thanks to the significant advancements made in the field of artificial intelligence and technology. Consequently, this system can generate substantial profits for the account holder without suffering from exhaustion or losing concentration.
It is important to keep in mind that utilizing a robot for trading does not guarantee perpetual profits, and there is a possibility that the robot’s forecast may fail.
Semi-automatic accounts
A semi-automatic account combines the expertise of both a human manager and artificial intelligence. While some trades are handled by the manager, others are executed by a robot. If a trade meets predetermined criteria, the robot can execute it without requiring approval from the manager. The key benefit of this type of account is the fusion of the manager’s experience and knowledge with the speed and precision of the robot, leading to substantial profits.
What factors should we consider when choosing a manager for portfolio management?
You are going to entrust your capital to a person or institution to conduct trades and earn profits. Therefore, not everyone can be responsible for this task, as someone who lacks sufficient experience in this field can potentially cause significant losses to your capital. Therefore, it is necessary to first examine the characteristics that are mentioned below.
- Experience as a manager in financial markets: The first thing you need to do is to review the manager’s track record; how many years of experience they have, how much profit they have made, who they have worked with so far, and so on.
- Method of work and strategies.
- The level of risk taken into account for your account.
- The number of trades they have executed so far.
- Ranking of the manager in the desired broker.
To investigate the aforementioned matters, it is necessary to have some familiarity with financial markets, particularly Forex. Therefore, even if you do not intend to trade in this market, it is advisable to do some research on it so that you have sufficient information when selecting a person to manage your Forex account.
What is a PAMM account?
PAMM stands for Percentage Allocation Management Module and works similarly to investment funds. It is a method used by people who wish to invest in Forex markets and earn profits from it, but lack the necessary skills or time to carry out trades. With PAMM, investors entrust their funds to traders who execute trades on their behalf. The following parties are involved in this method.
- Investor: The investor can divide their capital among traders as they see fit, giving $1000 to one trader and $2000 to another, for example. However, it’s important to keep in mind that any losses resulting from the trades will be incurred by the investor. Therefore, exercising caution when choosing traders to invest in is crucial.
- Forex trader: Trading with the capital of other individuals is what Forex traders do as professionals. Withdrawal of more money from the investor’s account is not possible for them, and weak performance leads to a loss of trust from investors.
- Brokerage companies: Brokers strive to establish a dependable trading platform that enables traders and investors to invest without the fear of money theft. Moreover, brokerage companies establish circumstances that enable investors to precisely evaluate the trader’s performance and knowingly entrust their money to them.
A low-risk account is offered by PAM, with the broker determining the amount of capital provided to the trader. The trader’s performance can be easily monitored and if there is a perceived risk to the capital, a request can be made to the broker to withdraw it.
Furthermore, the profit is distributed among the broker, trader, and investor based on a predetermined percentage.
How do we choose a PAM account?
When selecting a PAM account, it is necessary to assess different elements, including the account’s age, capital reduction, and other associated factors, which will be elaborated on later.
- Pamm account age: Accounts that have existed in the Forex market for an extended period possess substantial experience. Nevertheless, it is crucial to examine the trader’s trading history in addition to the account age since the trader may have a lengthy history while having a low account age.
- Profitability Ratio: The profitability ratio is the second factor to consider when analyzing an account’s balance. It’s important to calculate the ratio for both bullish and bearish market days.
- Account’s Capital Loss: The Forex market isn’t always characterized by an upward trend and may occasionally undergo a downward trend. Hence, it’s crucial to evaluate the amount of capital the PAM account has lost during market crashes. We advise against opting for accounts that have a track record of losing more than 40% of their total value.
- Capital level of Pamm account owner: When it comes to managing Forex accounts, it’s important to assess the capital level of the Pamm account holder as it directly impacts the level of risk and precision involved in the transactions. Essentially, the higher the amount of capital, the lower the risk and the greater the accuracy of the trades.
- Pamm account brokers: Numerous brokerages provide this service to their clients, but it is advisable to opt for brokers with a proven and reliable track record in this field, as the saying goes.
Therefore, conducting adequate research on this matter is recommended before entrusting your capital to anyone.
Advantages and Disadvantages of PAM Accounts
After reading this article, you should now have an understanding of what PAM accounts are and how to select them. In the following section, we will analyze the pros and cons of these accounts to enable you to make more informed investment decisions.
Advantages of PAM Accounts
- They have the potential to generate substantial profits for investors over the long term.
- They are a suitable option for individuals who lack the necessary time and knowledge to invest in the Forex market.
- Comparing different traders is possible with this type of account.
- Investors have the flexibility to allocate their capital among multiple traders.
However, it’s important to note that achieving high profits from managed Forex accounts is contingent upon selecting a reliable broker and skilled trader.
Disadvantages of a Forex account:
- There is a risk involved in Forex trading, which could result in substantial losses instead of profits.
- The trader is only entitled to a share of the profits, while the owner of the capital bears the burden of any losses.
- The return on capital is not guaranteed.
- The trading strategies of the trader are unknown to you.
Every trade carries the possibility of profit or loss. Hence, it is advisable to use surplus capital while trading in the Forex market or any other financial market, so that any potential loss does not affect your personal life.
How is the profit of a managed account divided?
The division of profits generated through Forex managed accounts is subject to the agreement between the involved parties. A probable arrangement could be a distribution of the profit based on predetermined percentages, regardless of the actual amount earned.
Moreover, it is possible to establish a certain profit threshold, and upon reaching it, each individual can receive their share of the profit. For instance, the account holder might stipulate that if a profit of more than 50% is attained, a 20% portion can be claimed.
Regardless, a contract between the account owner and the manager must be agreed upon, and all the conditions and terms should be explicitly stated within it.
Conclusion of Forex managed accounts
There are two ways to make a profit by investing in the Forex market:
- Learn investment skills and make transactions on your own to earn profits.
- Put your money at the disposal of another person or institution so that they can work with your money. There are two ways to use this method: either you give your account money to someone else to manage and share the profits with them, or you can invest in stocks where the profits are divided between you, the trader, and the broker. This method is considered low-risk.
It is advisable to gain knowledge and familiarity with the Forex market before investing in it. The greater your understanding and experience, the more secure your investment will be. In case of losses, do not despair and persevere on your chosen path.