At present, almost all the brokers in the Forex industry, offer its customers a vast number of investment instruments in addition to the self-trading environment. Today we will be discussing some of the most popular investment services and analyse their advantages and disadvantages, as well as define the categories of investors that may be interested to use this kind of tools.
These investment products are most popular within the forex industry, and each one of them has its own characteristics.
Let’s try to sort out the core differences between these products:
– PAMM-Account (Percentage allocation management module):
PAMM-Account is one of the most transparent instruments for the ordinary investor. There are a tremendous amount of PAMM services, what differentiates one PAMM from another is the publically available rating and not less important, the structure of the brokerage company serving the PAMM platform. A potential investor may always analyse the available rating of the particular PAMM account before making any further decision. As a rule, the client should obtain information about the number of transactions, the age of the account, the number of existing active investors, profitability and of course the drawdown. In some cases, brokers offer tools for in-depth, detailed analysis of the trading system and potential risks. We strongly recommend using those tools when it is available.
PAMM-System benefits from a module that distributes all the account transactions in direct proportion to the size of all the investor accounts connected to the main “parent” account. For example, if a trader opens a position of 10 lots on the EURUSD, this particular trade is divided between the individual sub-accounts (investors) into smaller parts based on the percentage of capital of each sub-investor-account inside the main account. This means that if the size of the individual sub-investor-account is equal to 1% of the equity of the main account, the volume of trading in this particular account will be 0.1 lots. In fact, the investor funds assigned to the PAMM manager’s account, but the funds are exclusively for the trading purposes only, and the PAMM manager unable to take over / withdraw these assets.
-For those who have no experience in forex trading, lack of time or simply do not want to trade themselves. For such individuals investment in a PAMM service is an excellent solution. You allow an experienced trader to generate income by a professional management of your trading capital.
-One of the most important factors for the investor is that the fund manager is utilising its private funds during the PAMM account trading. This entails an additional responsibility for the account manager because if the manager loses, he loses in the first place his very own invested capital.
– The majority of the PAMM platforms would always offer the interested investors with an online real-time statistics; this allows each potential investors to study, monitor and compare the different PAMM managers before making the final investment decision.
-If You are not familiar with the general concept of the different trading platforms, VPS-servers, Brokerage firms trading conditions and other features such as trades execution time, this service (PAMM) will be the easiest and most friendly for you. All you need is basic knowledge to come up with a balanced investment portfolio to make a profit and still benefit from small risks.
– One obvious disadvantage is the fact that some of the major regulations (FCA, NFA, ASIC, MiFid) prohibit public none licensed account management, hence with those regulations, we will find that the PAMM platform is forbidden. Many brokers work around this limitation by registering their clients below the less strict offshore regulations. Therefore, there are many good, highly reputable companies offering a more flexible and attractive products in their offshore regulated subsidiaries. While choosing an offshore regulated company it’s strongly recommended to study about it’s reputation and history. Mostly, the reputable brokerage firm won’t take illegal actions or manipulations towards the investors since the company will have to consider the possible impact of such actions on it’s licensed, properly regulated departments.
– Each PAMM-account has a predetermined investment contract period, following which there is the distribution of profits between the investors. Also within this period, the withdrawal of funds for the investor is limited. Each PAMM manager may set an individual investment contract period. For example, every two weeks or a monthly period. This imposes additional risks because the investor has no way to stop the trading at a certain fixed gain or loss within each investment contract period and only capable see the fixed outcome at the end of the investment contract period.
-In certain cases and depending on the invested amount of funds, PAMM service may be less attractive than, for example, copying (mirror trading) signal services.
Manager’s Fee 40%, which means the investor gets 60% out of the generated profits. This year total produced profits are $10,000, in this case, the investor get $6000 and the manager get $4000.
Now if we are talking about signal copy services (mirror trading), the average cost of a subscription to copy someone’s signals would be about $30 per month.
In yearly term: 30 * 12 = $360
So here we had an excellent example where the total cost of PAMM service would $3640 higher versus a signal copier service!
Of course, copying the signal service has its advantages and disadvantages, but we’ll discuss this later.
– MAM (Multi-Account Manager):
Account management based on the popular trading terminal MetaTrader 4. MAM technology based on a plug-in which allows simultaneous opening of open positions on all the accounts connected to the main trading account. The principle of operation is similar to the PAMM, but investors’ funds held inside their personal brokerage trading accounts. The volume of open trading positions and the distribution percentage of profits can be pre-set separately for each investor’s sub-account. The trades copied instantly without any slippage between the master and the sub-accounts.
– This service is very prevalent in the market and available to companies operating within the most solid and reliable regulations. Regulators such as CySec, FCA, NFA allow trading exclusively to licensed traders which in fact reduces the trading and operation related risks, although it does not remove them completely.
– Just As PAMM, the MAM platform is very flexible and convenient system allows each manager offer custom investment contracts to it’s investors.
– Each investor’ sub-account can be disconnected at any time from the main MAM account. That’s a clear benefit versus the PAMM technology where the investor imposed to wait until the end of the investment contract period.
– Suitable for investors with any skill level, including complete beginners.
– Also one of the core advantages is the fact that the main MAM account’s capital belongs to the trader (manager) and that adds a tremendous responsibility on his part as he trades his own funds in the first place.
-In General, among those brokers that offering MAM services, the rating of each MAM account is not visible to the public.
-Lack of visible public performance monitoring makes it tough to analyse the history of MAM-account without additional, more advanced tools.
-Investor cannot see the total number of connected investors and the total invested funds.
-For the individual investor, it is much harder to find a good MAM manager due to lack of public rating and monitoring access.
– Managed Account Trading:
What came first? The forex market or asset management service? You will be surprised, but the first modern analogues of asset management appeared in the old times of the Crusaders. Background on this subject can be found on Wikipedia. Next, we will discuss the modern form of asset management in the foreign exchange market.
So, how does it work? The Investor transfers the control of his trading account (opened in his name), in full or partial disposal of the trading manager or the management company, for the purpose of trading and profits generation on his behalf. Both of the parties sign a contract, which outlines the investment amounts, period and of course the expected risks involved with the trading. This method considered highly outdated versus the modern, more advanced solutions such as the MAM and PAMM. However, this solution still commonly used in the retail segment. Important to note that hedge funds and banks operating based on the classical type of account management.
– Investor’s funds stored inside the own, secure trading account, and the trader (manager) can only make trading activities, without any possible access to seize that capital.
– Pre-defined agreement towards the maximum possible drawdown of the particular managed account (solely in the case of licensed companies).
– The ability to set an individual risk plan.
– Individual approach to each investor.
– Expected yields several times higher versus the common bank deposits.
-The manager trading the investor funds without the risk of losing his personal wealth, that leaves a further room for more risk in his trading behaviour.
– The requirement of a substantial investment capital ($ 50,000) per each individual investor’s account.
– In Most cases, you must pay a mandatory fee for the management, regardless of the income.
– This is very easy to encounter scam companies and fraudulent managers in the account management sphere.
– Early withdrawal/halt of trading by the investor, before the agreed contract expiry date, may result in a penalty fee.
To conclude the above, it can be said that trading in the forex market involves risk, and each investor should be able to correctly assess and reduce the potential risks by making the better investment decision. The broad range of investment tools allows each investor choose the better solution for his personal financial abilities, style and needs. Additionally and not less important is the choice in the right trading manager, something we will observe in a better detail within our next articles.
InvestLike.Pro wishes you a profitable investment!