Fully Managed Forex Accounts
Many forex traders search for the best managed forex account, PAMM, MAM and LAMM. Allowing a trader to have full control over your account has its benefits and risks.
It is very convenient for some expert to manage your account while you continue with your day-to-day routine. Can you however make money from managed accounts?
There are several type of managed forex accounts. If you are considering applying for a managed account please take a note of the following types of management.
Percentage Allocation Management Module (PAMM)
PAMM accounts is where dozens of trading accounts are all managed under a single trader under the same broker. The trader has his own funds in the account.
The PAMM account may consist of 50% investors’ capital while 50% of funds are the account’s manager. All trades that are executed split evenly across the accounts based on the percentage of the allocated funds.
Lot Allocation Management Module (LAMM)
As opposed to PAMM, the trader has the ability to set different leverage per managed account individually. Some trading accounts may execute trades with higher leverage while some with small leverage.
Overusing the leverage often comes with higher risks as should the trade end with a loss, due to the leverage it may be a large chunk of he invested funds.
Multi Account Manager (MAM)
MAM is a combination of the above. The trader has complete control over the managed accounts, especially when determining the trade size.
We will shortly discuss the risks and advantages of managed forex accounts. It is important to know that many traders also trade on their own.
Managed Forex Accounts, Good or Bad?
Managed forex accounts may initially appear to be the best solution for forex traders. A seasoned trader or an Expert Advisor (EA) is often behind the trading account, executing and closing multiple positions in the market.
Managed forex account is suitable for many types of traders including part-time and full-time traders as most of the analysis and strategies are executed by the account manager.
Multi Account Manager (MAM) accounts are a similar to managed forex accounts with one main exception. The forex manager or the EA has full control over the account. In some managed accounts types you may have the ability to control the leverage, drawdown, what currency pairs to disable etc.
Under a forex MAM there is virtually no control and you may only have the ability to withdraw your capital from the account after a pre-agreed duration, which is often several months. Let’s go over the pros and cons of using a managed forex account.
No trading knowledge is required as it is manged by a seasoned trader or an algorithm
The positions are managed by a dedicated manager or algorithm
Low fees as the account manager is compensated through the returns that are made
If no returns are made (watermark model) no fees are deducted
No control over the trades that are executed
The forex manager is prone to psychological pressures
Limited updates on the progress of the positions
Higher risk on most occasions
Managed Forex Accounts Risks
Managed forex accounts MAM or of similar nature may appear as an attractive form of investment to less experienced traders. The main disadvantage trading in a MAM are the psychological pressures on the forex manager (we will shortly address expert advisors).
As the forex account manager is compensated through the returns that are made in the account, he or she may be unlikely to tolerate losses. If for example the forex manager made +7% return in one month and the following month a loss of -4% is incurred, the investment manager will only be compensated after he earns back the 4% loss.
It can take a month or even several months depending on the performance of managed account. Many forex account managers will not tolerate being unpaid for such a period of time.
The majority tends to simply drift in a drawdown without closing the trade with a loss. That way it will not be considered as a loss as the trade is still open and the trader may be compensated on profitable traders that were closed.
The above comes on the expense of the trader that allocated his or her capital to the managed forex account and is regarded as one of the biggest disadvantages of signing with a forex MAM.
Managed Forex Accounts Risks: Stop Loss
To avoid losses, many account managers, PAMM or MAM set large stops or avoid stop loss orders at any costs. While stops are being hunted (known as stop loss hunting) but it is an insufficient reason not to predetermine the loss.
Setting fixed large stops (such a +700 pips in EURUSD) often suggests there is no analysis behind the location of the stop. It is important to know where to place stops in trading rather than setting an extremely large stop to ensure a loss is avoided.
It is true that the market has the tendency to correct weakness and strength of a currency pair but nevertheless a stop loss is required to contain losses. Allowing losses to spiral out of control may be reckless behavior.
Managed Forex Accounts: The Profit
The second disadvantages is also related to how the forex manager is paid. Most forex managers also enjoy a portion of the spread that is paid by the forex broker. Half a pips is the standard to the best of our knowledge but some brokers may offer as much as 1 pip per trade for large trading volumes.
Most forex managers will seek to maximize their profits and not solely from the market. Scalping is the most rewarding form of trading under MAM’s or any managed accounts. Instead of executing a single trade, targeting 30 pips for example the account manager executes multiple trades, targeting 3 – 5 pips.
Every trade that is executed and closed rewards the account manager with a portion of the spread regardless whether a profit or loss was incurred.
In our opinion this is unethical as forex manager places his or her interests first but it is a known phenomena is the forex managed accounts industry. DDMarkets forex trading signals are not compensated through the spread or any affiliation with a forex broker. The interest of our members always comes first.
Managed Forex Accounts: Expert Advisors
Expert Advisors or EA’s require high technical skills and in-depth understanding of the markets’ dynamics. As opposed to manual trading the EA is dependent on specific technical entries. These technical entries are also tied to specific market conditions. When these market conditions are not present negative fluctuations may be seen in the EA’s performance.
Due to commission structure of managed forex accounts some EA’s are designed to opt for greater risks in order to recover from losses rather than a more conservative approach. It is done in an effort to ensure the forex manager is paid.
We are quite entertained by back testing results, a tool that is designed to test the EA over the past several years. The market conditions that took place since the financial crisis were caused by central banks loosening their monetary policies. In recent years we are witnessing central banks beginning to tighten their monetary policies.
Back testing is therefore likely to provide inaccurate results which even the EA developers may be unaware of due to lack of trading experience. The average lifespan of an EA is 6 months. As the current market conditions were not present in recent years it may be difficult to assess the possible future performances of EA’s.
Trade, Smarter via Trading Signals
Our members learn over time how we analyze the market, what technical or fundamental factors force us to react and how open positions are managed.
You have full control over the leverage, which trades to dismiss (if you wish) and the ability to manage the trade on your own (if you are an experienced trader) as the strategy for the forex trading signals are outlined in extreme transparency.