How Forex PAMM Accounts Work

Some Forex / CFD brokerages, typically the larger ones, offer a "PAMM Account." What kind of account is this? "PAMM" stands for "Percentage Allocation Management Money Module." In other words, a PAMM account is basically a managed account where one trader executes trades on behalf of others through their account.

PAMM accounts work by the Forex/CFD brokerage using a software application that allows the brokerage's clients to assign part or all their accounts to management by a specific trader. The managing trader then manages his own money, but piggybacked onto that is the money of other clients, who each receive a percentage share of the deals' profits or losses into their own accounts.

Example

Let's assume you are a retail trader with your own account, and other traders with the same broker urge you to manage their accounts. Let's assume that you have $10,000 of your own capital and that Trader B gives you $40,000 to manage, and Trader C gives you $50,000 to manage. With a percentage allocation of 10%, you are currently trading a total of $100,000.

According to the percentage allocation to the fund contributed by each trader, Trader B's allocation will be 40%, and Trader C's allocation will be 50%. You placed in an order to purchase 1 complete lot of EUR/USD. Your broker will allocate 0.1 lot to you, 0.4 to Trader B, and 0.5 to Trader C for this trade.

The foreign exchange market has no central location and is rather unstructured and widespread. It operates through electronic trading conducted by forex retail brokers, central banks, commercial banks, and commercial businesses.

Typically, the market is segregated into three primary sessions that see the highest levels of activity, namely the Asian, European, and North American sessions, also referred to as the Tokyo, London, and New York sessions, respectively. Occasionally, a fourth Australian (Sydney) session is employed to bridge the time gap between Tokyo and New York.

How PAMM Account Works

Trader creates a private PAMM account. They need to meet the minimum amount of capital (required to open the account) stated on their Forex broker's website and specify the investment conditions in a PAMM manager offer (minimum investment deposit, time period of investment, bonus as a percentage of profit obtained, etc.).

The investor examines the trading results of the trader with a system tracking PAMM accounts held with a brokerage or any other system, analyzes conditions established in the offer, and then decides to invest.

The trader carries out trading. In principle, it should encourage the trader to be responsible, but it can be different in practice. Funds of the investor and trader are used in trading. If your broker offers the given function, you must establish a maximum loss limit or keep an eye on your account. In the event of heightened risk, you should take advantage of the opportunity to withdraw your funds early (if permitted by the conditions outlined by your broker).

Choosing a Manager for PAMM Investment?

After we have dealt with what PAMM accounts are, a reasonable question arises: "How to pick PAMM accounts from the other ones listed in a rating of PAMM managers?" The various interfaces make the choosing process more challenging for PAMM accounts services. On the other hand, a set of broad criteria and filters makes it easier to choose trustworthy PAMM accounts.

Let's consider them in the order of their importance:

PAMM account age

First, I choose PAMM accounts with a broker rating and filter PAMM managers by account age. It is, in my opinion, the most crucial selection criterion. The first reason for thinking so is that it excludes the possibility of a PAMM manager with plain luck.

The second reason is that an account with a long history lends itself to more in-depth analysis. We suggest considering PAMM accounts dated no less than 6 months. New PAMM history opened by PAMM managers can be regarded as exceptions, and the history of their PAMM history should also be analyzed.

Maximum Drawdown Criterion

You should select accounts by maximum drawdown criterion if feasible after age-based filtering. This criterion gives you a clear understanding of the dangers to which investors' funds are subjected when investing in a PAMM account. We recommend considering accounts with a maximum drawdown of no more than 40% for starting investors. We recommend selecting forex traders who trade directly or through "safe" forex robots.

PAMM account profitability

After filtering PAMM accounts by their age and maximum drawdown level, you should only consider potential profitability criteria. The selection of accounts by their success relies on an individual approach of the investor. We can only conclude that the re-criterion and the maximum drawdown criterion (what is Drawdawn) should be considered since stratospheric re-profits rise to the same level.

In my experience, accounts with a maximum drawdown ability of 1:3 demonstrate the best performance, i.e., the maximum drawdown ability does not exceed 15% in the event of a 5% re. Few PAMM accounts meet the conditions and certainly deserve the attention of investors.

Equity of PAMM manager

It would help to focus on the PAMM manager's equity while selecting a PAMM account. The greater the equity value, the more risk there is for the PAMM manager when they are trading their own capital. A total equity balance of the PAMM account (investors + managers) should be considered when evaluating the worth. If the equity of the PAMM manager makes up at least 10% of the total balance, it is better.

Equity of investors

The reasoning is pretty straightforward: a sizable fund under management suggests a high level of investors' trust.

Final Words

The main problem with the PAMM capital accounts system is that the investor is unaware of who manages his capital. It can be both an experienced trader, a starting trader employing a hazard strategy, and even a robot developed by a broker to intentionally destroy investors' accounts after several profitable periods of PAMM dealing. The problem of the openness of the Forex trader can be partially resolved by publishing his trading statements, negotiating risk with various brokers, and negotiating risk with investors.