With your hectic schedule, your interests in trading foreign currency exchange markets seem impossible. Your lack of knowledge about it might even like up to the load that you are already carrying. If that is the case, Forex PAMM accounts might be the answer to your problem.
What is a Forex PAMM account?
PAMM stands for percentage allocation management module, but others define it as percentage allocation money management. PAMM is a software application and a form of pooled money Forex trading which allow clients to allocate their money to his chosen money manager or qualified trader. PAMM is predominantly used by foreign exchange brokers wherein the money managers are managing one or more account simultaneously using one trading platform only with the aim of generating an income out of the pooled money or from their own pocket or capital.
Each managed account has its own ration in PAMM. PAMM system lessens the individual risk of trading as it distributes the risk among multiple investors while bringing up a larger amount of money for trading.
In order to understand further what PAMM accounts are, take a look at this example.
Persons involved when setting up a PAMM account:
- Forex brokerage firm/ Forex broker
- Money managers
Assume that there are three investors who are interested in Forex trading, yet they don’t have the time to do it that is why they opted to seek help from professional money managers who are knowledgeable enough in managing their individual account alongside with the money of their people. The money managers will sign up an agreement with a Forex trading firm to manage the money of the people which in this case are the three investors. On the other hand, the three investors will sign a Limited Power of Attorney which means that they agree to the risk, once they have entrusted their money to the firm and to the money managers. The charge of the money manager for doing the job is also stated in the agreement.
- Investor number 1 deposited $200,000 with a ratio of 9.3%.
- Investor number 2 deposited $800,000 with a ratio of 49.5%.
- Investor number 3 deposited $600,000 with a ratio of 41.2%.
For example, the money manager decided to buy $10 million, the order is allocated between the accounts of the three I investors in accordance with the ratio that is stated which means that the accounts of these three investors have their fair share of profit and loss.
What are the roles of the Forex broker?
- Make sure that the money managers are following the regulations
- Provide a reliable and secure trading platform
- Assists in different trading transactions which include withdrawals and deposit
How is the process of selecting a money manager done?
There are different ways on how an investor can choose the right money manager for him. The brokerage firm provides the investor with information about the money manager which are as follows.
- Past Experiences
In order to choose the right money manager for the investors, the following tips should be considered:
- The only Forex trading asset available is the one offered by the money manager
- The profit or loss during trading greatly depends on the capacity of the money manager
On the other side, money managers should keep the following in mind:
- They can only use the pool money which means that they are not allowed to get any additional money in the trading account of the investor
- They are allowed to accept or deny investors
- They have the power to set limits for each investor
PAMM is specially designed for people who are not expert in Forex trading or people who don’t have enough time to trade by themselves. With PAMM, the risk in trading is minimal whole the profit is great especially when the money manager is doing well. On the other side, the risk of losing the capital is also high when then money manager isn’t that good. That is why it is very important that the process of selecting a money manager should be carefully and meticulously done.