What is a forex PAMM account

PAMM, also known as Percent Allocation Management Module is a concept in forex trading that allows investors who do not want to trade forex but want to invest their money in a fund manager who trades using their investor’s capital and in return offers a share of the profits from their trades. Forex PAMM accounts are available with most forex brokers and signing up for a PAMM account is a little bit different to creating a regular forex trading account. PAMM accounts have grown in popularity in the recent times thanks to the mainstream acceptance of online forex trading.

Forex PAMM accounts are used in reference with forex fund managers, managed forex accounts and forex money managers.

Forex PAMM accounts make for an ideal win-win situation for all the parties involved. As an investor who isn’t familiar with the intricacies of forex trading, investing in a PAMM account is a lot more easier. As a fund manager or money manager, the more capital available to trade offers a bigger potential for profits (and losses).

When using forex PAMM accounts, the investor basically invests their money in a personal account manager who trades forex on their behalf. The Money Manager usually offers a certain percentage of profits for their investors.

How does Forex PAMM Works?

The forex fund manager usually offers a customized product to the Investor on factors such as management & performance fees, minimum investment amount, early withdrawal penalty and so on. The Fund Manager usually manages the clients by making use of the MetaTrader Multi Terminal.

To better understand forex PAMM, it is best to refer to the example below.

Trader Joe creates a PAMM account with a forex broker and invests $2000 by himself. He then gets two investors, A and B who invest $5000 and $3000 into Trader Joe’s PAMM account. This puts Joe’s PAMM account capital at $10,000 (50% invested by A, 30% invested by B and 20% funded by Joe).

After the first month’s trading, Joe makes a total profit of $5000. The profits are shared amongst the three based on their initial investment. So A gets 50% of the profits which is $2500, B gets $2000 which is 30% and Joe gets to keep $500 which is the 20% of the initial investment.

Because of the PAMM set up, Investors A & B are now required to pay the success fee of 20%. So A pays out $500 and B pays out $400 to Trader Joe.

Trader Joe Investor A Investor B
Investment $2000 $5000 $3000
Profits made after Month 1 $5000
Profit Distribution $500 $2500 $2000
Success Fee (20% of Profits) $500 $400
Final Profits $1400 $2000 $1600

Investors needs to carefully research into the fine print before choosing a particular fund manager. Most forex fund managers allow investors to make a monthly withdrawal on the profits. Pre mature withdrawal usually incurs a penalty.

Forex PAMM – Details about success fees

In order to understand how the success fee is calculated, investors should understand a concept known as High Watermark basis.

The High Watermark basis is the highest level or point that an investment fund has reached. The high watermark is important because it ensures that the fund manager does not get paid large sums for poor performance. The high watermark basis is essential because in the event the fund manager loses money during a period of time, the fund manager must get the funds above the high watermark level before they can get any success fee.

Illustrating the high watermark basis by using an example where the success fee is set to 10%

Month Starting Balance Profits
1 $1000 $100
2 $1100 -$200
3 $900 $200

In month 1 the fund manager made a profit of $100. The fund manager gets $10 which is 10% of the the profit. During the second month, there is a loss of -$200 so no success fee is paid. In the third month, there is a profit of $200. However because the starting balance for month 3 was at $900, there is no success fee paid despite the profits. The starting balance for the fourth month is not back to $1100. Any profits made from this month onwards will incur a success fee.

Tips on choosing a Forex PAMM account

Age of the account: The fund manager’s age of account is essential to get a basic understanding of how long the trader has been working on their accounts, the balance changes in time and also makes it easy for investors to evaluate the fund manager’s growth and stability.

Current profit: The current profit of the fund manager is an essential factor that represents the trader’s success. However, past and present success should not be used as an indicator for future performance. So even if you get tempted by the current profit at 300%, there is no guarantee that the next month’s profit will be 300% as well. Most new investors often give the current profit too much attention which is incorrect. Other factors such as stability and the profits made in different time periods should be considered and will most likely give the investors a better realistic estimated average returns in profits.

Minimum investment amount: The minimum investment amount is usually set by the forex broker and is known as the floor. Howevet, fund managers are free to set up their own minimum investment amount as well. If you completely new to forex PAMM accounts then it is advisable to invest small and scale up over time and as you gain more experience.

Trading style: This information is usually given out in the fund manager’s portfolio. As an investor you can get a basic idea on the fund manager’s trading style, most traded instruments and so on. This information is voluntary so some fund managers do not wish to disclose this information upfront.

PAMM Success fee: The success fee is a percentage of the profits made from your share of the invested capital. This is also refered to as the manager’s remuneration. The PAMM success fee is automatically transfered to the fund manager’s account end of every month. In terms of choosing a forex fund manager, it is usually advised to tolerate high success fee for an experienced fund manager instead of paying lesser success fee to a smaller or relatively new forex fund manager.

Recovery: The recovery indicates how quickly the fund manager is able to recover after getting hit by losses. This is a good indication of the fund manager’s trading psychology and is an important factor that should be looked into.

How to open a Forex PAMM Account

  • Refer to the list of PAMM Forex brokers
  • There is a minimum required capital set by the forex broker, this usually starts from $500 and above
  • The fund manager can set their own minimum investment capital
  • The fund manager charges a success fee. The success fee is a percentage of the profits that is to be paid out to the fund manager on a montly basis

Why invest in Forex PAMM Accounts?

For investors who have spare money, having funds secured in a bank interest rates does not yield a good return. By making use of a forex PAMM account, investors would be able to invest their funds as capital for a forex fund manager who then trades with the invested capital and distributes the profits of the trades to the investors at regular intervals.

To conclude, investing in a forex PAMM account is ideal for investors who want to put their money to work. Investing in Forex PAMM accounts offers for both short term and long term profits as well. Read more to see a list of recommended PAMM Forex brokers.

Published by Editorial Team
ForexPromos Editorial Team is comprised of a selection of hand picked editors that bring you the latest breaking news from the financial markets. We also provide forex educative articles as well as comprehensive fx broker reviews.

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