Interest in investing in financial instruments has long gone beyond the circle of professional participants of the markets. Numerous Fx brokers, attracting clients, offer new technological solutions – user-friendly trading platforms, personal dashboards, operational communications support and enhance the ability of trading with large variety of instruments from major currency pairs to CFDs contracts for shares of leading companies, oil, gold, metals, coin-currencies.
Services are also constantly updated, introducing new solutions. In 2006, the market become enriched with a new service, proposed by Fx brokers – PAMM-accounts. Now almost all operators offer this service to their customers.
What is PAMM-account?
PAMM account is a form of investment management for clients with professional traders — asset managers. This service is a form of trust management of the investor assets by professional traders.
There is no money transfer, and only owner has access to account. All the trades the trader makes on his own account with his own personal funds, are simultaneousely copied to investors account. Investor is able to constantly monitor account status, to see all transactions and make a decision on closing or disconnecting from a PAMM service at any moment.
PAMM-account is percentage participation (sharing) in management, starting from the abbreviation of PAMM (Percentage Allocation Management Module). Trader performs trading operations that are copied to your account. The copying takes into account the relative size of the accounts of the trader and the client. Thus, the PAMM-account is the mechanism of share participation in funds management and distribution of benefits and losses between the investor (account owner) and trader, who was instructed to commit the transaction in proportion to the current size of the deposit each.
When you join PAMM account, there’s an automatic transfer of transactions from trader’s account to the accounts of investors take place in certain proportions. This technological solution has become very popular among customers who prefer transactions in the financial markets bank deposits, and so among novice traders that are still willing to take the risks because of the lack of experience and knowledge.
Attaching to the account a professional trader eliminates the emotional stress and fear of loss that invariably accompanies novice investors. The absence of trade algorithms can lead to the rapid loss of deposit.
By copying experienced trader, you get the opportunity both to earn and to analyse; you eliminate unnecessary mistakes.
Terms and conditions
- Money Manager trader uses his own trading strategy and trades his own funds, posting transaction statistics and results.
- Investors choose the asset Manager based on the benefitability, risk level, acceptable drawdowns, trading history and the period within which the trader showed a positive result.
- Fx brokers publish rankings online. Investors can examine all the statistics, as well as the number subscribing to this specific account investors.
- The relationship between the investor and the owner of the account and the asset Manager is — trader shall execute an agreement of an open offer, which spells out the main details of the remuneration of the trader, terms of the contract, conditions for early withdrawal, risk tolerance and others.
The interest of the trader in making benefits determined by direct compensation dependent on the trading results. His reputation has won the trust of the participants, acceding to his account. The more investors joins the PAMM account, the more the value of the total consolidated accounts, the greater the absolute value of earnings of the Manager.
Trading results for a specified period, usually a month, he gets a percentage of benefits to the consolidated account. For example, if a set the percentage of the trader is 40% of the benefits received during the month, then the investment amount of $1,000, the yield of 10%, the fee will be $40, the investment of $10,000, the Manager will earn $400. There is a practice of ranking reward from the count values of the investor. The difference is very significant from 50% to 15%. The larger the investor, the smaller the percentage will be deducted to the Manager. For example, when investing $ 100, the award percentage will be 40%, with $ 1,000, at 25% of $ 10,000. – 15%.
Distribution losses are also divided in a certain ratio in accordance with the terms of the offer. With a negative result, the trader does not receive remuneration, and the rules of many brokers remained without a Commission until the deposits of its clients. Thus, the motivation of the Manager of the PAMM-account is obvious.
The decrease in yield leads to loss willing to invest, not to mention the loss which not only they reduce their own funds, but also lead to the downgrade and lack of interest from potential investors. Investor interest is also quite clear – don’t do separate transactions, they receive a substantial deposit growth.
Strategy: Managers choice
Fx brokers offer open and transparent system of monitoring for PAMM-accounts. In addition to the rate of return over a certain period, they specify the age of each account, the number of accessions to the expense of investors or the value of the consolidated capital, the capital of the trader, maximum drawdown for the period, the average drawdown risk trading strategy. In an open offer specifies the remuneration of the trader for different categories of accounts, the value of the deposit to join the account closing conditions for the transaction by the investor, disconnecting client from account.
Thus, the investor can obtain sufficient information to choose the Manager to whom he could entrust the fate of your account.
What’s the criteria to make a choice?
The age of each account is a reliable indicator. If a trader shows good results for a long period of time – more than a year, at least six months – this is a favorable signal. The rate of return associated with the riskiness of the trading strategy. The high yield has a downside – increased risk. The average monthly yield of 10% – 20% of the most interest to potential investors and income above what banks can offer, and the risk is acceptable. Needless to say, there are managers who earn 100% – 200% benefit. Therefore, the investor has a wide range of choice. Another indicator of the stability of trading – the ratio of benefitable and losing trades. If 60% successful trades accounted for 30% failed, it is quite an acceptable ratio.
The size of the maximum drawdown can also illustrate the degree of risk the trading strategy, as it depends on principles of capital management applied by the trader. Too big drawdown signs very distant stop loss that when losing series, and in the financial markets everything is possible, you can reset any deposit.
Golden rule of financiers – “not pulling all eggs to one basket” holds true for investing in the PAMM. With sufficient size of the deposit it makes sense to divide funds among several managers trading different strategies on different markets. This will help to diversify risks.