Choosing the best PAMM account does not have to be daunting once you know what to examine. When selecting a PAMM account, we need to briefly evaluate the broker hosting the PAMM and, more importantly, the money manager’s performance.
The latter is more significant since investors have very little to no information about their strategy. However, by understanding specific attributes, they can gauge their consistency over time. This article will cover what to look for in a PAMM broker and a money manager.
What is a PAMM account?
PAMM (Percentage Allocation Management Module) is a type of managed account in forex, an allocation or pooling system where the positions of one experienced trader are automatically copied onto the platform of an investor/s.
A broker typically provides the software to link the ‘slave’ account/s onto the ‘master’ account.
The experienced traders (also referred to as money managers) receive a pre-determined commission from any profits they generate, with the remainder going to the investor/s according to a percent allocation; the broker receives spreads and commissions from the positions.
Things you need before investing in a PAMM account
As an investor, you will need to have the right mindset with regards to your investment. Considering a PAMM account should come with long-term thinking as partaking in any financial market is not a ‘get-rich-quick scheme.’
Although the purpose of a PAMM is for passive investment without any formal or technical knowledge about the markets, it is beneficial to have some baseline awareness, specifically about the risks involved.
Aside from some basic understanding of forex, one needs to be equipped with the performance metrics to observe when seeking the best account manager (covered later). Arguably, the essential consideration introduces one of the golden rules of investing; ‘Don’t invest money you can’t afford to lose.’
An investor may select what they believe to the best account manager, though their past performance is not a guarantee of future results.
Tips on selecting the best broker for a PAMM account
Selecting the best broker for a PAMM account is the same as choosing one ordinarily as a private trader. Below are the helpful guidelines to increase one’s chances of making the best decision.
Regulation is often the starting point in assessing the legitimacy and reputation of any firm in the financial markets.
Ideally, a good broker should have regulation from at least two top-tier regulators; namely ASIC (Australian Securities and Investments Commission), FCA (Financial Conduct Authority, which is UK-based), CySEC (Cyprus Securities and Exchange Commission), and any others from Germany, Switzerland, Canada, New Zealand, the United States, and Japan.
Proper regulation ensures a reliable reputation and a broker adhering to the highest ethical standards for their clients. Furthermore, a regulated entity needs to abide by numerous safeguarding practices such as segregated accounts, which gives full trust that client deposits will be safe.
Regulated brokers also tend to have extensive support channels in multiple languages and several offices in different parts of the globe, all factors that benefit the customer experience.
Broker reputation and age
This point extends from the regulation part since, naturally, a regulated broker generally has a favorable reception in most trading communities. How long the company has existed is another indicator of reliability. Clients must invest in PAMM brokers with at least five years in the business.
Broker deposits and withdrawals
Here, ideally, one must look for brokers offering a wider choice of payment options and around 2-day withdrawal times. Deposits and withdrawals must not incur high fees.
Tips on selecting the best account manager for a PAMM account
Before selecting the best PAMM account manager, a familiarisation of some of the performance metrics that’ll be covered will better guide the decision-making. While the primary goal of choosing the manager to invest with boils down to profit, how they arrive at this point is more important.
As we’ve established, investing in PAMM should be a long-term endeavor. An assessment in the performance statistics should confidently forecast how a particular manager may do next month or next few months.
All the following objectives are not listed in a particular order of importance, though investors should consider them holistically. They should also bear in mind, not all PAMM accounts will provide all of this data, but they should undoubtedly cover most. It is also recommendable investors diversify their investment across at least two different managers.
The age of the manager’s account is a telling statistic about their strategy’s consistency. Ideally, one should only consider PAMM accounts at least a year old (preferably older).
Although some analysts may argue the number of trades done by the trader is also crucial, it’s the quality of those positions rather than their quantity that ultimately matters.
This is one of the most important numbers in assessing a money manager as it reflects how they deal with losing streaks, an inevitable event in financial markets.
Drawdown refers to the reduction of a trader’s capital after a series of losses. For example, if a trader started with $1,000 and, after a month, ended up with $800, we would classify this as a 20% drawdown ($200 loss).
Unfortunately, there is no universally accepted recommended drawdown rate in forex. However, generally, investors should not consider percentages above 20% (anything below is manageable).
An account with a 60 to 70% drawdown can still be profitable, though this reflects risky, erratic trading performance and a high likelihood the trader could lose substantially in the future.
The profit factor is a measurement that divides the gross profit by the gross loss (including swaps and commissions). As a rule of thumb, a profitable account should have a profit factor above 1.
Named after the legendary American economist William Sharpe, this ratio is well-respected for judging all kinds of investments as it measures the risk-adjusted returns. Any Sharpe ratio above one is considered brilliant.
Investors can also look at other indicators (if available) like a favorable risk to reward ratio, recovery factor, and expectancy. However, if the attributes above have been fulfilled, the account should be profitable while still not being susceptible to large losses. Ultimately, these milestones form a good base and summarise what investors should study.
To conclude, although investing in a PAMM account is less risky than actively trading, investors should perform considerable research. Hopefully, this article has provided all the necessary details to make an informed decision. To recap, these are the main tips for selecting the best PAMM account.
- Choose well-regulated brokers with many years of experience, a good reputation, and several payment options.
- Where possible, investors should spread out their investment through at least two money managers rather than relying on one.
- Performance-wise, the most important aspects are the account age (at least a year), less than 20% drawdown, a profit factor above 1, and a Sharpe ratio above 1.
- For further refining, one could also consider the risk to reward ratio, recovery factor, and expectancy of a money manager’s trading strategy.