How I became a Consistently Profitable Trader!
A lot of things are possible in the retail forex trading industry. While some people actively trade their accounts by themselves or by copying successful traders, others delegate the trading activity on their accounts to other traders under the ‘Power of Attorney’. There are different types of managed accounts in forex trading, such as PAMM, MAM, and LAMM. Here we’ll discuss each of them, compare them and take a look at what the regulators do about them.
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PAMM (Profit Allocation Money Management)
The Profit Allocation Money Management, PAMM, is a method of managed account in which investors funds are pooled together and traded by an account manager such that profits and losses are shared proportionately among the investors. Like every managed account, this process is facilitated by a forex broker that offers the platform through which the investors and the account manager can relate. Pepperstone is a very good example of a forex broker that offers this service.
Being a way of pooling funds together, PAMM is a good way of distributing risk among the investors and helps to weather the storm of short-term volatility so as to enjoy long-term gains. The profit or loss accrued by each investor depends on the proportion of his investment to the entire fund. For example, if a manager has three investors: A, B, and C, who contributed 30, 20, and 50 percents of the entire fund respectively; whatever profit or loss made in each trade, A gets 30 percent, B gets 20 percent and C gets 50 percent of it.
This is a simplistic explanation though, as the account manager takes a certain percent of the profits for his services and, mandatorily, has his own funds invested the fund as well which is entitled to a proportional profit or loss.
Copy trading using your own assigned and trusted Broker might be a better approach.
MAM (Multi-Account Manager)
The Multi-Account Manager, MAM, is a method that allows the account manager to trade each investor’s account separately and differently. Thus the manager has the flexibility of assigning higher leverage and other risk management parameters to specific sub-accounts. MAM accounts can give better profit potentials but can also be very dangerous. It is more suitable for investors who understand how the market works and can tolerate higher-risks. An uninformed newbie shouldn’t invest in this type of account.
LAMM
In the Lot Allocation Money Management, LAMM, each investor’s account is traded separately but in the same way. Whenever the account manager opens a position, the same position is opened in each investor’s account irrespective of the account size. This is a recipe for destruction for the smaller accounts. Expectedly, this method is no longer invoke, because of the issues associated with it.
Comparing the three types of managed accounts — PAMM, MAM, and LAMM
METHOD | STRUCTURE | DISTRIBUTION OF PROFITS AND LOSS | WITHDRAWAL | MINIMUM DEPOSIT | |
PAMM | Investors’ funds are pooled into a single fund which the account manager trades. | A single account where all funds are pooled. | Distributed proportionally at the end of the agreed trading period, such as monthly, half-yearly or yearly. | At the end of the agreed trading period, such as monthly, half-yearly or yearly. | It depends on the broker and the account manager. |
MAM | Each investor’s account is traded separately and differently making use of different leverage and other risk parameters. | Different account for each investor. | Each investor takes the profit or loss the account has made at the end of the agreed trading period. | At the end of the agreed trading period, such as monthly, half-yearly or yearly. | It depends on the broker and the account manager. However, MAM is suitable for investors that can tolerate higher risks. |
LAMM | Each investor’s account is traded as a separate account but with the same lot size for all accounts. | Separate account for each investor. | Each investor can take the profit or loss the account has made at any time. | At any time. | It depends on the vendor but always larger than PAMM. |
Are these sorts of investment regulated?
Since 2012, financial regulators, such as the FCA in the U.K., the NFA in the U.S., the ASIC in Australia, and others, have taken combined action to eradicate the unlicensed financial advisory services and dishonest sales practices of forex brokers. Having identified the pushy sales tactics used to lure novice investors with promise of unrealistic returns, regulators in the major markets — U.K., U.S., Europe and Australia — have placed serious restrictions on PAMM and similar managed accounts, the amount of leverage that can be employed and the level of knowledge a prospective account manager must have before being allowed to operate.
Conclusion
It is a common knowledge that most of the novice investors resort to investing in managed accounts after failing in trading themselves — being lured by the promise of huge profits. While some managed accounts may be profitable, a lot are not. It is always advisable to be cautious when considering investing in managed accounts. The old adage comes to mind here — if it looks too good to be true, it probably isn’t.
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