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Is Investing In Forex PAMM Accounts A Safe Financial Instrument?

If you are interested in trading foreign currency exchange markets but don’t have the time or know-how, Forex PAMM accounts may be a good choice for you.

It is the ability to earn with the help of experienced traders without trading yourself!

What Is A PAMM Account?

Percentage allocation management module, also known as percentage allocation money management or PAMM, is a form of pooled money forex trading.

The participants in the PAMM Account setup:

  • forex broker/ forex brokerage firm
  • trader(s)/ money manager(s)
  • investor(s)

Let’s assume Tom, Dick, and Harry, are the investors and are interested in making profits from forex trading, but they all don’t have time to devote to trading activities or don’t have sufficient knowledge. That is where the professional money managers (Kenneth and Mark) come in.

For straightforwardness, let’s assume that all three investors chose Kenneth to manage their share of money for forex trading and Kenneth charges 10% of the profit. Here is what the share from each investor and the manager’s own trading capital in the total pool looks like:

In terms of percentage contribution to the total pooled PAMM fund of $ 15,000, each investor has the following share:

Dick = $4,000 / $15,000 = 26.67% and equally,

Tom = 23.33%

Harry = 16.67%

Kenneth = 33.33%

(The sum of all shares in the pool always remains 1 or 100%.)

Suppose one trading term goes by and Kenneth was able to make 30% profit on his pool, which now stands at $19,500 ($15,000 + 30% profit or $4,500).

He removes his 10% charge on profit or $450. The remaining profit of $4,050 is shared to all investors based on what percent they each have in the total pool:

Dick = $4,050 * 26.67% = $1,080

Tom =$4,050 * 23.33% = $945

Harry = $4,050 * 16.67% = $675

Kenneth = $4,050 * 33.33% = $1,350

Total = $19,050

Supposing all three investors choose to continue with Kenneth for another term. Dick and Tom stay invested with their (original + returns) amount, while Harry withdraws the profit, leaving only his original investment of $2,500. Tom also refers a friend, Jane, to join the pool, and Jane brings $2,625. Another new investor, Mary, signs up and picks Kenneth to manage her $1,000. The total trading pool for Kenneth is now = $22,000.

Percentage share for each investor:

Dick      = $5,080/22,000 = 23.09%

Tom    = 20.20%

Harry       = 11.36%

Kenneth = 28.86%

Jane      = 11.93%

Mary     = 4.55%

Kenneth manages a 15% return during this term (15% * $22,000 = $3,300) and takes his 10% ($330). The outstanding profit of $2,970 will be shared to investors per their individual share:

Dick      = 23.09% * $2,970 = $685.80

Tom    = $600.08

Harry       = $337.50

Kenneth = $857.25

Jane      = $354.38

Mary     = $135.00

Total pooled money in the fund = $24,970.

Now, let’s suppose all the investors continue with the above investments for another month with Kenneth, who unluckily loses 20%. This means no 10% profit share for Kenneth and each investor will see their share of the pooled investment drop by 20%, bringing the pooled money down $4994 to $19,976.

Dick      = $5,765.8 – 20% = $4,612.64

Tom    = $4,036.06

Harry       = $2,270.00

Kenneth = $5,765.80

Jane      = $2,383.50

Mary     = $908.00

Total pooled PAMM fund for Kenneth = $19,976

By the close of each term, investor has the option of continuing with the money manager, move to another, or cash out the capital.

The role of the forex broker is to:

  • Give a secure platform.
  • Ease the trading activities of money managers.
  • Assist with the account keeping.
  • Allow transparent review.

How Do Investors’ Select Money Managers/PAMM account brokers?

Here are a few things to consider:

Investors

  • Usually, the investors have no choice of forex trading assets, except for those offered by the money manager.
  • The risk of losing capital, but also enjoy the potential of returns if the manager performs well.

Money Managers/PAMM account brokers

  • Have access to the money only in their pool.
  • Can set a minimum/maximum amount criteria for investors.
  • Can accept/deny new investors as they wish.

The Bottom Line

With PAMM accounts, investors gain from profits with little involvement. But, PAMM accounts also carry the risks of capital loss. Always perform due diligence in choosing PAMM account brokers and money manager.

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