The face of the forex trading industry has changed over the course of years by the introduction of various management tools that enable traders of all skill levels to widen their scope of earning maximum returns. Now traders who have little to no knowledge of the working of the forex market are able to earn similar profits like other experts by opting for systematic managed accounts such as a PAMM account.
The usage of PAMM accounts in forex trading has been increasing due to the wide number of advantages it provides to its users. PAMM is short for percent allocation management module or percent allocation money management. Many brokers offer a PAMM account system that is managed by a PAMM manager whose responsibility is to involve more money in trading while simultaneously dividing the risk between various investors.
What Do We Know About A PAMM Account?
A PAMM account system is a form of a managed account that works on the concepts of pooled money in forex trades. This type of account enables the investors to assign their funds with a forex broker who then allocates the respective funds to a PAMM account manager incharge of managing and handling other trader’s accounts as well. A PAMM account system enables a trader to potentially gain considerable amounts of profit without requiring a manual input. The PAMM account manager is commonly referred to as a fund manager who is subjected to some percentage of profit from his trading activities only, if the trade yields profit.
Participants Involved In A PAMM Account Setup
- A broker.
- A PAMM account manager who is responsible for assigning funds across trades.
- Investors who assign their money with the broker platform.
How Do You Invest In A PAMM Account?
Now before you start allocating your funds with a particular PAMM account manager, some degree of research on its working, terms and conditions should be conducted. A good PAMM account manager will have required licensing and necessary regulations by a responsible regulatory authority. Trading through a PAMM account should be procured by a bilateral policy between the broker and the fund manager.
Advantages Of Using A PAMM Account
Traders can enjoy a plethora of benefits by using a PAMM account for their trading strategies and needs:
- In a PAMM account system the trade activities are carried out by an experienced account manager therefore, novice and less experienced traders can earn profits despite not having much knowledge and expertise of the forex market.
- PAMM accounts are managed by a fund manager and they are subjected to a percentage of profit from their trade activity therefore, a manager will carefully execute trades as any wrong decision will also jeopardize his own share of profits.
- Even though the account manager is in charge of executing trades by allocating required funds, he still is incapable of having direct access to the funds in a traders account.
- The PAMM account system imposes no restrictions on the number of traders who wish to join it as multiple accounts can be easily managed by one master account.
Limitations Of Using A PAMM Account
There are certain drawbacks of using a PAMM account system that a trader can consider before opting as it might help in making informed trading decisions:
- A PAMM account system is somewhat closed in nature, therefore it imposes restrictions on a trader to have an idea about the trading strategies of the PAMM account manager.
- Simply using a PAMM account can not guarantee definite profits as the probability for a trade to succeed solely depends on the eligibility of the PAMM account manager and his strategies.
- Traders are at a potential risk of losing all their money if the broker doesn't allow the fund manager to impose a maximum loss limit feature.
Important Things To Keep In Mind Before Picking A Suitable PAMM Account Manager
- Tenure- You can check and evaluate the eligibility of a fund manager by the time duration for which he has served. A longer working tenure adds extra loyalty points to the credibility and eligibility of the account manager. In most cases, the time period for which the manager has served should be a minimum 6 months. A shorter time duration draws an incomplete picture of the manager's success.
- Return On Investment - Although the success of a trade can not always be guaranteed, traders should definitely pick a manager who is at least able to maintain a stable rate on investment.
- Profit Share - Traders should carefully evaluate the share of profit that a fund manager is entitled to once his strategies succeed. You should choose a manger who provides you with a detailed insight on profit sharing and hidden charges if there are any.
- Ask As Many Questions - Since it is your hard earned money that you are assigning with a fund manager therefore, you should not shy away from asking as many questions as possible. Clearing your doubts and getting an uncomplicated idea about the trading strategies along with the usage of funds should be prioritized.
- Recovery Factor - The probability of a trading strategy to control a drawdown is called recovery factor. This facility might not be available on certain PAMM accounts however a trader can calculate his own recovery factor by considering the profit ratio and maximum drawdown.
Takeaway
Forex trading with the help of managed accounts like PAMM have benefited multiple traders around the globe. A trader should carefully evaluate and perform some kind of research to get an idea about the working of a PAMM account and if it will be beneficial in the long run or not.
There are thousands of PAMM accounts available online each offering its own unique features and benefits to lure traders. Do not go for an account because others are doing so. It is up to an individual to pick a PAMM account based on personal requirements, expectations, availability of funds and skill level.