There are different ways of gaining returns on Forex with minor involvement of a market participant. In this tutorial, let’s figure out two popular strategies of money management: PAMM accounts and social trading.
In both cases, a market participant is not involved directly in trading but acts as an investor entrusting his/her funds to professional speculators. For this reason, both PAMM accounts and the ForexCopy service is an excellent solution for the two categories of traders.
Both investment strategies suit perfectly beginners who do not have sufficient knowledge to trade Forex and hence need assistance of more experienced traders.
The second group represents market participants who have enough trading skills but who lack time to devote to trading activities.
Comparing PAMM accounts and social trading (or mirror trading), you can find out that these two investment methods differ in transparency and risk management. Besides, each method implies its own degree of responsibility from managing traders. Now we are going to discuss in more detail both strategies of passive investment to sort out which of them is easier to understand and safer to use.
Let’s start with PAMM accounts as this method of passive returns on Forex was invented earlier. This investment strategy appeared in 2008, earlier than social trading. PAMM accounts brought about a revolution in the trust management of capital. Indeed, this strategy made it possible to unite a professional trader and investors within the common deposit and gave them the opportunity to allocate profits among them in proportions specified in an agreement. PAMM is an acronym for Percentage Allocation Management Module that is a form of pooled money forex trading.
In other words, PAMM represents a set of special trading accounts to trade Forex through which managing traders (trustees) manage their own funds and pooled money from investors. Interestingly, any participant can act as a managing trader who accepts funds from investors and in parallel as an investor who provides one’s own funds to a trustee’s account, reckoning on a certain profit share in case of a successful trade.
Bearing this in mind, PAMM accounts can be divided into two types:
An investor’s account serves to transfer funds to managing traders’ accounts;
A managing trader’s account serves to amass investments from investors’ accounts.
Providing funds to a PAMM account, an investor entrusts his/her capital to a selected money manager thus agreeing to take the risk for the manager’s forex trades. In this case, profits are supervised by a broker and shared in proportion to investments. A managing trader is rewarded with a commission which is debited from returns gained. You should beware of unsuccessful trades and losses that a managing trader may incur. However, a money manager is keenly interested in success. The more winning trades a money manager executes, the more investors will opt to trust him/her with their savings. Therefore, the more money he/she collects for management, the higher returns all participants will gain.
How to foresee and choose an efficient and reliable trader who will manage your investment in good faith? As a rule, brokerage firms post an appropriate rating to help investors make their choice. Ranks of managing traders are updated according to their gains and losses. In addition, investors can find out information on overall investments managed by such traders. A good solution would be a PAMM account which yields 4-6% returns per month. Once such a deposit is spotted, an investor should read carefully the conditions of the agreement with a future partner to have an idea about would-be gains. To reckon such gains, an investor should find out what minimum deposit is allowed by a money manager and for what term as well as what percent of returns is charged as a commission.
Let’s try to figure out how a profit could be distributed in a PAMM account. Let’s assume a money manager charges a 30% commission. An investor provided a minimum deposit of $1,000 for the shortest term of 1 month. Let’s suppose a money manager earned a 10% return that equals $100. After simple calculations, we estimate that an investor has been able to earn $70 in passive investment and a net profit has come in at 7%.
In essence, this investment method is very similar to the trust management scheme, though PAMM accounts look more appealing. The major advantages of this investment strategy are a fully automated process, transparency, diversification of risks, and tax exemption.
At the same time, PAMM accounts have also some flaws such as:
A money manager usually charges high commissions. He/she commonly sets a commission varying from 20% to 50% of returns.
Rather high risks. In the best case, a money manager applies a highly risky trading strategy like Martingale. In the worst case, an expert could end up being a con artist of a kitchen broker.
An investor could encounter trouble withdrawing funds. Commonly, a partnership agreement stipulates a fine for withdrawing funds ahead of time, i.e. before returns are distributed among participants.
Some drawbacks of PAMM accounts became too evident when a related investment strategy was introduced to market participants. Social trading or mirror trading that was later called ForexCopy was rolled out in 2012. So, traders got to know an investment strategy which allows them to duplicate trades of successful forex investors.
In both cases, a market participant is not involved directly in trading but acts as an investor entrusting his/her funds to professional speculators. For this reason, both PAMM accounts and the ForexCopy service is an excellent solution for the two categories of traders.
Both investment strategies suit perfectly beginners who do not have sufficient knowledge to trade Forex and hence need assistance of more experienced traders.
The second group represents market participants who have enough trading skills but who lack time to devote to trading activities.
Comparing PAMM accounts and social trading (or mirror trading), you can find out that these two investment methods differ in transparency and risk management. Besides, each method implies its own degree of responsibility from managing traders. Now we are going to discuss in more detail both strategies of passive investment to sort out which of them is easier to understand and safer to use.
Let’s start with PAMM accounts as this method of passive returns on Forex was invented earlier. This investment strategy appeared in 2008, earlier than social trading. PAMM accounts brought about a revolution in the trust management of capital. Indeed, this strategy made it possible to unite a professional trader and investors within the common deposit and gave them the opportunity to allocate profits among them in proportions specified in an agreement. PAMM is an acronym for Percentage Allocation Management Module that is a form of pooled money forex trading.
In other words, PAMM represents a set of special trading accounts to trade Forex through which managing traders (trustees) manage their own funds and pooled money from investors. Interestingly, any participant can act as a managing trader who accepts funds from investors and in parallel as an investor who provides one’s own funds to a trustee’s account, reckoning on a certain profit share in case of a successful trade.
Bearing this in mind, PAMM accounts can be divided into two types:
An investor’s account serves to transfer funds to managing traders’ accounts;
A managing trader’s account serves to amass investments from investors’ accounts.
Providing funds to a PAMM account, an investor entrusts his/her capital to a selected money manager thus agreeing to take the risk for the manager’s forex trades. In this case, profits are supervised by a broker and shared in proportion to investments. A managing trader is rewarded with a commission which is debited from returns gained. You should beware of unsuccessful trades and losses that a managing trader may incur. However, a money manager is keenly interested in success. The more winning trades a money manager executes, the more investors will opt to trust him/her with their savings. Therefore, the more money he/she collects for management, the higher returns all participants will gain.
How to foresee and choose an efficient and reliable trader who will manage your investment in good faith? As a rule, brokerage firms post an appropriate rating to help investors make their choice. Ranks of managing traders are updated according to their gains and losses. In addition, investors can find out information on overall investments managed by such traders. A good solution would be a PAMM account which yields 4-6% returns per month. Once such a deposit is spotted, an investor should read carefully the conditions of the agreement with a future partner to have an idea about would-be gains. To reckon such gains, an investor should find out what minimum deposit is allowed by a money manager and for what term as well as what percent of returns is charged as a commission.
Let’s try to figure out how a profit could be distributed in a PAMM account. Let’s assume a money manager charges a 30% commission. An investor provided a minimum deposit of $1,000 for the shortest term of 1 month. Let’s suppose a money manager earned a 10% return that equals $100. After simple calculations, we estimate that an investor has been able to earn $70 in passive investment and a net profit has come in at 7%.
In essence, this investment method is very similar to the trust management scheme, though PAMM accounts look more appealing. The major advantages of this investment strategy are a fully automated process, transparency, diversification of risks, and tax exemption.
At the same time, PAMM accounts have also some flaws such as:
A money manager usually charges high commissions. He/she commonly sets a commission varying from 20% to 50% of returns.
Rather high risks. In the best case, a money manager applies a highly risky trading strategy like Martingale. In the worst case, an expert could end up being a con artist of a kitchen broker.
An investor could encounter trouble withdrawing funds. Commonly, a partnership agreement stipulates a fine for withdrawing funds ahead of time, i.e. before returns are distributed among participants.
Some drawbacks of PAMM accounts became too evident when a related investment strategy was introduced to market participants. Social trading or mirror trading that was later called ForexCopy was rolled out in 2012. So, traders got to know an investment strategy which allows them to duplicate trades of successful forex investors.
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