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Percentage Allocation Money Management accounts, or PAMM for short, are accounts based on the collaboration of investors who combine their money and a money manager who trades the pooled capital on behalf of all the investors. Generally, the money manager will add their own capital to the pool in order to avoid any conflicts of interest and to make sure they are always trying their best to trade for a profit.
Surfing the Forex brokerage websites, you might have faced the option of percentage allocation money management or PAMM. This is a relatively new way for investors to trade in the Forex market.
When you start investing through a PAMM account, it raises some concerns for investors as they let someone else control their money. That brings up many questions about PAMM, and in the following article, we will be directing this new trading strategy.
PAMM stands for percentage allocation money management, and it works by pooling money from several investors, and then a money manager uses these funds to trade on the behalf of the collective.
If the trade is profitable, investors in PAMM accounts earn their profits based on their contribution to the total money invested by the group. The same rings true for any losses that they might face, which is also based on the percentage they contributed to the pooled money.
Investors usually invest in PAMM accounts when they have the trading capital and are interested in Forex trading, but do not have the time or the experience to trade by themselves.
PAMM accounts are hosted by brokerage websites, where investors and managers meet and agree on the terms of the trade. PAMM managers also contribute to the pooled money, and they own a share of the profits, which makes it imperative for them to make a profit.
PAMM accounts can be found on brokers’ websites, and they consist of three main participants:
PAMM brokers offer a platform where investors and managers interact, and the broker works to ensure that the ground rules for both parties are set and kept. This helps to make sure that each party involved is clear about their duties and obligations.
Facilitating the money transfers, deposits, and withdrawals, is mainly what PAMM brokers are there for. They offer the trading platform that the money manager uses for trading, using the spread and the features offered by the broker.
Brokers also ensure that the investor’s capital on the brokerage account is separated from the capital invested in the PAMM account.
They own the money that is poured into the pool and which will then be used by the manager for trading. An investor needs to be registered on the broker’s website, and have their account verified before using a PAMM account.
PAMM investors choose a money manager from among those offered in the PAMM accounts, and they decide how much money they want to invest. They receive their gains or losses as a percentage of how much they invested in the total money pool.
Investors sign a limited power of attorney that allows the money manager to perform trading activities on their behalf.
Money managers are basically traders who have enough experience and time to deal with other investors’ capital, to trade by their own style and strategy. They charge a commission as a percentage of the total profits made.
PAMM managers are offered by the broker website, they are listed alongside their years of experience, equity, rating, reviews, and CV, which helps the investors to choose who they want to be dealing with their money.
PAMM Money managers trade by their own strategy and investors cannot dictate what they do. They decide how to make money and how to trade the pool. Taking into account that managers also invest their own capital into this account, it is in their best interest to make a profit.
Managers can only use the money that is being invested by the traders, and they cannot pull extra money from the investors’ accounts on the broker’s website.
Several investors decide to gather their funds together and choose one money manager to invest their combined capital. The money manager then decides the trading conditions such as the total term of trade, the amount of money that will go into each trade, the currency pairs they will be trading, and so on. Once these terms have been agreed upon, the investors then move money from their trading accounts on the broker’s website to the PAMM account, and the money manager starts trading the pooled funds.
If the PAMM trade ends successfully, the manager takes their commission charge as a percentage of the total profits made, and the remaining gains are then distributed among all participants based on the share that each participant initially invested.
Let’s say three investors gathered in a PAMM account. We'll call them traders A, B, and C. They are entrusting their money to a money manager, who charges 10% of the total profits as a commission.
Let's say that trader A and trader B invested $2,000 each, trader C invested $3,000 and the money manager invested $3,000 of their own money. So the total money pool is $10,000. To calculate the share of each, trader A and trader B hold 20% each, trader C 30%, and the money manager holds 30% each. Thus accounting for 100% of the investment capital.
The PAMM manager starts trading with the amount of money allocated, using a selected currency pair. Say that the trading term has expired, and the manager managed to secure a 30% gain.
A 30% gain on the $10,000 means a profit of $3,000. The following will then take place:
Trader A and B will each receive $540, Trader C will get $810, and the money manager also gets $810.
After this distribution takes place, participants decide whether they want to reinvest this money in the PAMM under the same money manager or take their profits along with their initial investment and part ways.
The option to start investing in a PAMM account is usually found on a broker’s website, where you need to register and get started. This is considered a risky option and is mostly used by investors with deep pockets, who don’t have time or trading experience.
Using a percentage allocation management module or PAMM requires due diligence by the investor, who has no control over the trading activity of the money manager.
It is possible to be scammed by a fake PAMM account if the broker itself is a scam, that is why an investor needs to look for a reliable broker that offers a reliable PAMM account.
It is not recommended to sign up with an unlicensed broker, that’s why you need to look for a broker that is licensed by a recognized legislative authority.
A licensed broker is under continual observation from regulators and is subject to heavy fines if it acts in a way that goes against its license agreements. Because of this, it is generally safe to trust PAMM accounts provided by these brokers.
In addition to that, you need to make sure that the payment methods at the broker’s website are suitable for you, whether you prefer credit/debit cards, e-wallets, or wire transfers, you need to make sure that the broker accepts this payment method. We recommend choosing one of our pick of top licensed Forex brokers and starting a PAMM account with them.
Money managers are listed in the PAMM account program, and investors can select one based on their profile, the experience they have in trading, the reviews they have received, their rating, and the amount of equity they handle.
Investors need to be careful how they choose a PAMM manager because once they sign the agreement, the money manager will have full control over the funds they set aside for the PAMM account.
Experience is definitely one of the most important factors to look for in a money manager, the more experienced the manager the better. However, more experienced managers might take a bigger commission fee, so you need to look for those that have around 3-4 years of experience in order to find a good deal.
Another quality to look for in a PAMM manager is the maximum drawdown. This will help the investor to limit the amount of money they are risking, and having this at a maximum level of 40% is usually acceptable among PAMM investors.
The broker website allows you to see the profile history of the PAMM manager which allows you to check the consistency of the trader to see how often they gain on their trades. Also, check the profitability to have an insight into how much money a selected PAMM manager might make.
PAMM in Forex seems like a great deal for some investors. It saves them time because they do not need to spend weeks and months learning about trading and trading platforms. Not only that, but it also saves them from having to actually make trades, watch their investments, try to exit trades at the right level, and all those other fun (or not so fun) things that go along with Forex trading.
However, there are some drawbacks to PAMM accounts. Let’s take a look at what you might gain or lose with a PAMM account.
PAMM stands for percentage allocation money management, where investors pour money into one PAMM account, and an experienced money manager uses this pool to perform trading activities. The PAMM manager is also participating in funding this account, so it is in their best interest to realize some gains from the trade. Profits are distributed based on the share of each participant.
You need to get registered on the broker’s website and verify your account, then deposit money into your trading account as per the minimum deposit requirement. After that, find the PAMM account option on the website, start by selecting the PAMM manager that suits you, and allocate the amount of money you want to invest from your trading account.
If the broker is licensed and well-regulated, then trading with a PAMM account is safe. However, you need to look for the PAMM money manager’s qualities such as experience and profitability. Always remember that even experienced traders can make losing trades, so never trade with money that you can not afford to lose.
Investors add funds to a PAMM account, and the money manager starts trading for them. If the trade sees success, all the participants get a share of the profits based on the share they contributed. Note that there is a manager commission that is deducted from the total profit, after that, the remaining profit is distributed among participants.