The forex market boasts the largest daily trading volume globally and operates 24 hours a day, five days a week. Additionally, it is more decentralized compared to traditional stock or bond markets, reducing the potential for market manipulation .
On the flip side, mastering forex trading can be challenging, requiring investors to invest a substantial amount of time, effort, and gain experience before achieving consistent results. However, not everyone who desires to trade the forex market can dedicate the necessary hours and commitment due to other obligations and responsibilities.
If you’re an investor aiming to trade forex but lack the ability or confidence to succeed on your own, you may consider entrusting your funds to an experienced forex trader who can invest on your behalf.
You can achieve this through what’s known as “Percentage Allocation Management Module” (PAMM). PAMM accounts are advantageous for investors seeking expert assistance and for traders interested in executing trades on behalf of their clients.
Here’s how to choose the best PAMM accounts in 2023, and why it matters.
What is PAMM and how does it work?
PAMM is a method of trading forex (as well as other securities) alongside an experienced or professional trader. In theory, it shares similarities with copy trading, where you follow the trades of an experienced trader with a proven track record and deep knowledge of the forex market.
However, in practice, PAMM is more passive than copy trading because you don’t have to execute trades yourself. Instead, you deposit funds into a PAMM account, which are then pooled together with funds from other investors. An experienced trader is designated as the investment manager and takes responsibility for investing and managing the pooled funds on behalf of the investors.
Often, the investment manager also contributes their own funds to the pool, typically constituting a significant portion of the total funds. This incentivises the investment manager (and reassures investors) to work diligently and manage the fund to the best of their abilities.
In return, the investment manager of a PAMM scheme is entitled to charge a commission for their services. This usually comprises a flat percentage of the portfolio’s value and a percentage of the realised profits.
Other investors own a share of the total portfolio in proportion to their initial contribution. Profits and losses (after commissions) are allocated among all participants, in accordance to their share of the fund.
How does PAMM work?
Here’s a simple example to illustrate how PAMM works.
Let’s assume there are four parties involved – an experienced trader appointed as the investment manager, and three individual investors. Here’s how much each of them allocates to the pool, and thus their share of the portfolio.
|Party||Amount invested||Share of the portfolio|
|Adam (investment manager)||$50,000||50%|
Adam charges 2% + 20% for his services. This means he is entitled to 2% of the overall portfolio as well as 20% of any profits made.
Let’s assume the investment makes a 10% gain – S$10,000. Here’s how much each party will receive (including their original capital).
|Adam||Commissions: 2% of $110,000 + 20% of S$10,000 = $4,200 Share: 50% = $50,000||$54,200|
|Barry||($20,000 – 2%) + (20% x $8,000)||$21,200|
|Celine||($18,000 – 2%) + (18% x $8,000)||$19,080|
|Dawn||($12,000 – 2%) + (12% x $8,000)||$12,720|
Note that as the investment manager, Adam makes the highest return on his investment, owing to the commissions paid.
The other three parties pay the 2% commission, and share the remaining profit, which is 80% of $10,000 = $8,000.
Should the investment make a loss, the losses are distributed in the same way. However, as there are no profits, Adam only collects 2% in commissions.
Note that besides the commissions and fees charged by the investment manager, PAMM accounts may also be subject to trading and account fees, charged by the brokerage.
These charges go towards the costs of maintaining and supporting the PAMM platform, as well as recruiting and supporting professional traders to act as investment managers.
What features do the best PAMM accounts have?
Whether you’re an investor seeking an account manager or a professional trader interested in trading on behalf of clients, PAMM accounts can be a viable option. However, it’s important to note that not all PAMM accounts are created equal.
Here are the features that top-notch PAMM accounts have in common, which you should pay attention to.
Reputation and compliance
It’s important to take into account the reputation and regulatory standing of the PAMM account provider to avoid potential issues and safeguard your rights in case they arise.
The most reliable PAMM accounts are typically offered by globally recognised brokerages that hold full licenses and adhere to regulations in the jurisdictions where they operate. Opting for such reputable brokerages should be your primary consideration. In contrast, brokerages that appear untrustworthy or lack the necessary licenses should be avoided.
Platform and software
PAMM accounts are digital platforms that require online connectivity for seamless trade execution and transactions. The performance largely hinges on the quality of the software platform hosting the PAMM account.
It is also important to provide investors with features and functionalities that enable them to monitor their accounts effectively. Investment managers should also have access to an array of trading tools, including charting tools, price charts, indicators, and other essential resources.
The ideal PAMM accounts should be reliable, user-friendly, and powerful enough to cater to all the requirements of both investment managers and their clients.
Securities and assets
PAMM accounts are only as valuable as the extent to which you can trade the specific securities and assets you intend to invest in.
However, quality should take precedence over quantity, and reputable brokerages focus on offering the most popular and widely traded securities. This strategy ensures there is ample liquidity for traders to execute trades, while also keeping spreads tight to minimise costs for investors.
Brokerages that claim to provide access to every conceivable asset may encounter issues such as high spreads and low liquidity – two factors that every investor and trader should steer clear of.
Fees and charges
Speaking of costs, brokerages may charge additional fees to PAMM accounts, which are levied outside of the commissions paid to the investment manager.
While this is a common practice, leading brokerages strive to give their customers a fair deal by not including hidden fees or excessive charges.
It is recommended to thoroughly understand the commissions, fees and charges you could face when choosing a PAMM account.
Transparency and payouts
This applies to both investors and professional traders acting as investment managers for PAMM accounts.
Transactions, as well as fees and charges, should be readily accessible and clearly displayed in your account. This allows you to easily access the relevant figures whenever needed, without unnecessary hassle. This transparency is crucial for investors to monitor their portfolios and for traders to meticulously track their performance and results.
Depositing and withdrawing funds should also be a seamless and hassle-free process, available at any time as needed.
Regarding profits and payouts, they should be transparently displayed and promptly credited to the relevant parties. Top-tier PAMM account brokers make it a priority to ensure their investment managers receive their commissions and profits within a reasonable timeframe.
The bottom line: How to choose the best PAMM accounts
Now that you have gained an understanding of how PAMM accounts operate, their potential benefits, and the key features to consider, you are well-equipped to select the most suitable PAMM account for your specific needs.
There are many PAMM account providers available, so it is advisable to take your time and assess your options thoughtfully and objectively.
Consider exploring the Vantage PAMM Account, which offers top-tier trading capabilities and robust account management functions that streamline the pooling of investor funds and enhance investment outcomes for Account Managers.
With an automated onboarding process, unlimited investor admission, and automated commissions payments, you will have everything you need to trade for your clients while building your business at your own pace.
- Investopedia, What Is Forex Trading? A Beginner’s Guide, https://www.investopedia.com/articles/forex/11/why-trade-forex.asp