What Type of Managed Forex Account is the Best?
Description: We weigh up the pros and cons of the two main types of managed forex accounts.
For individuals who want to earn money from the forex market but have neither the skills nor the ability to do so, the best alternative is to allow other individuals to trade for them through managed forex accounts. There are two major types of managed forex accounts: the trade copy type and the percentage allocation management module. So which one is the best?
Managed Forex Accounts – Type 1: Trade Copy
With this type of managed forex account, the trader simply sets up his trading account and then goes through social trading services like Zulutrade and the like to pick traders whose trades will be immediately copied by his account – on autopilot.
- With this type of managed forex account, the trader is able to go through a wide range of providers and then select the best ones
- The trader can allocate as many managers to his account as he likes, by simply adding them to the account portfolio
- The trader also has the ability to select the lot size he wants every trader to maintain at any given time, so he has control over how much can be risked from his account
- The trader still retains the ability to trade by himself if he so wishes, and the trades entered by him will not affect those entered by the account managers – or vice versa – except when the margin level is too low to open new positions
- The managers are paid a commission by the social network, so the trader does not have to worry about paying commissions from profits realised
- The managers on the social trading networks are mostly individuals who are only after the commissions paid out, so professional trading ethos is discarded, for all practical purposes
- It is equally difficult to find a manager with a sustainable strategy, as the majority are testing and chopping trading strategies, thereby effectively using traders’ funds as “lab rats”
- When two or more managers are linked to an account, their trading style may clash, leading to a possible crash of the account
Managed Forex Accounts – Type 2: PAMM
In this type of managed forex account, the trader locates a professional trader running a PAMM account and then signs up under him. The funds are automatically added to the trading account of the fund manager.
- The trader gets to select a manager with a proven track record
- The relationship is managed strictly by the same broker, so disputes are settled promptly and in a fair manner as soon as they arise
- The manager is only paid after a profit is made for the month. With the high watermark regime employed by most traders, managers are not paid if they do not make a profit on the previous month’s highest balance.
- The account setup process could be a bit cumbersome, as most brokers request that a power of attorney form be filled by the trader that wants his account to be managed.
- The account is a read-only account, as trades can only be conducted by the manager.
- Commissions could be as high 40% of total profits made for the month.
Going by this, you can see that both types of managed forex accounts have their advantages and drawbacks. It is incumbent on the trader, therefore, to make up his mind regarding his preferences.