What is a managed Forex Account?
Managed Forex Accounts refer to an investment opportunity for individuals who want to take serious risks in their pursuit of massive potential returns from forex trading. The individual puts money in a forex account and a professional trader trades that money in the markets on the individual’s behalf. Investors choosing this investment opportunity are aware of the risk of severe losses but are optimistic about unusually large gains in the future.
There are many Forex brokers who offer managed account services with minimum deposit requirements as low as $2000. By using the services of a professional manager, individuals can bypass the risks and the extra time it takes by inexperienced traders, and reap the impressive gains as a result.
The nature of the forex market is such that it is more suited for sophisticated traders who have the ability and knowledge to handle substantially large sums of borrowed funds to amplify their profits. The liquidity and faster-paced trading action, as well as lower transaction costs also make it an appropriate instrument for speculators. So, choosing a managed forex account and letting professionals handle the trading is the better option instead of relying on one’s own inexperience.
Types of Forex Managed Accounts
Generally, there are three types of Managed Forex Accounts: PAMM, individual, and Pooled.
Percent Allocation Management Module or PAMM, also known as MAM or LAMM in some cases is a type of account management where a sophisticated software program allocates fees, gains, and losses to its clients on an equal percentage basis. The concept of PAMM accounts are relatively new and offer an additional level of protection from fraud as it lets the client deal directly with the broker of their choice.
The chosen broker proceeds to enlist a professional trader to the client and limited power of attorney agreement is signed between the two parties. As a result of this, the professional can trade on the client’s behalf. The client can terminate the agreement at any time if he/she is unhappy with the professional trader’s performance. In LAMM accounts, the software allows leverage to vary on an account basis. The software for MAM accounts combines the aspects of both PAMM and LAMM.
An Individual Account is a separate account in the client’s name where a professional trader trades on the client’s behalf, taking all buy /sell trading decisions. The professional discusses the level of risk the client is comfortable with, before trading begins. Based on the risk level, the professional will take trading decisions.
One of the disadvantages of this type of account is that the client’s business should be worthwhile for an expert or professional to invest their time and effort in. This is the reason why there are high minimum deposit requirements, exceeding $10000. Clients not willing to make this level of commitment should look at the other account options.
A Pooled Account acts in a way similar to a mutual fund, involving many investors pooling their capital together in a single fund, separately. The investors share in the profits as well as expenses and fees. Normally, there are a variety of pooled funds brokers offer. Clients can choose them according to fee demographics, risk/reward profile and terms and conditions. It’s up to the client to conduct due diligence and read individual prospectus to see which account matches their own objectives. Each fund comes with a published performance history.
Clients can enter a pooled fund for less money than an individual account, with initial deposits being as low as $2000 in some cases. However, in some cases, clients can only withdraw after they meet a required period of participation.
Key metrics to choose Forex Managed Account
- Calmer Ratio: The Calmar ratio is a measurement of risk adjusted returns for any investment fund. When deciding on which managed forex account to choose, clients can take a look at the Calmar Ratio of their prospective account manager. The Calmar Ratio compares the annual average compound rate of return of the manager’s trading fund with the maximum drawdown in the same time period. This ratio is typically measured over a period of three years. As a rule of thumb, a higher Calmar ratio indicates better risk adjusted returns from the manager. Conversely, a lower ratio indicates worse risk adjusted return results for the manager.
The Calmar Ratio is advantageous because it measures risk by using maximum drawdown as a component. Apart from being more understandable by investors as compared to other risk gauges, it is more reliable. This is due to its standard three-year time frame increasing its reliability over other risk gauges with shorter time frames.
- Strategy: Another thing to consider the strategy which the account manager implements when trading on the client’s behalf. The trading strategy implemented should not be riskier than what the client is comfortable with. There are some trading strategies which carry inevitably more risk than others.
Clients should also take a look at the size of funds under management(FUM) of the managed account service. A good FUM can indicate that a good trading or investment strategy is implemented. A gradually increasing FUM is a sign that the managed forex account is using a steady and consistent investment strategy.
- Verified Track Record: Its always preferable for the managed forex account service provider or broker to produce verified track records of past performances. A manager with a good track record can produce some assurance for the client about profitable performances in the future, even though it’s not always the case.
The Bottom Line
Managed Forex Accounts can be a great way for earning impressive gains by having a professional trader trade on your behalf. They are ideal for people who have the required capital but are too busy to take part in trading directly and for people who simply lack the psychological make-up of a professionally experienced trader.