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What is a PAMM account? What kind of investment option does PAMM trading provide?

What is a PAMM account? What kind of investment option does PAMM trading provide?

PAMM stands for Percentage Allocation Management Module (PAMM). This is a form of investment in which traders that have established track records of profitable trading offer their services to manage funds of investors as well as their own under a single portfolio account. All profits and losses generated by the trading activity on this account are split between the manager and investors, according to the percentage of capital that each has contributed to the total pool.

PAMM is therefore supposed to be a symbiotic relationship between an experienced trader serving as the account manager, and the inexperienced investor who has access to a pool of funds which can be traded for money. PAMM evolved as a system of account management because of the obvious gap between the profitable traders and the unprofitable ones. Trading is a very engaging and consuming activity. Naturally, everyone would like to take a bite of the trillions of dollars that pass through the financial markets, but not everyone is cut out for it.

How Does a PAMM System Work?

The entire system is built around the skills of one or more persons who will be serving as the account managers. Anyone can bring money to the table, but the skills set to trade profitably are in short supply, especially in the retail segment of the markets. 9 out of 10 retail traders will lose their first account in the first 90 days of their trading careers. Statistics taken over time has shown this. With only 1 out of every 10 going to be a likely candidate, and an even smaller number of this ever going to be a PAMM manager, it is essential that the selection process from which a manager will emerge is well understood and utilized.

What to Look For When Selecting a Manager

If you are an intending PAMM investor, what should you be looking at when selecting a manager to handle your funds?

A) The size of the manager’s capital must be commensurate with that of every investor in the PAMM account. If we have two investors bringing $3,000 and $2,000 each, and you have a manager that only has $500 as capital, that manager is not fully vested in the account. Indeed, the investors are taking 4 times and 6 times more risk than the manager. But if the manager is bringing $2,500 to the table where the investors bring the said amounts, then it means that the level of vested interest by all parties is just about equal. Once a manager knows that he or she is just as vested as the investor, a greater level of seriousness and accountability comes into the manager’s work.

B) Look at the manager’s stats. You want a manager with low drawdowns and a profit pattern that is neither too steep nor too flat. Accounts can sometimes get into negative territory before they become profitable. If an account stays in negative territory for prolonged periods of time, this is a high drawdown situation which is undesirable. Also, profit charts which are steep indicate use of excessive risk. A losing trade will in equal measure cause a wild downward swing.

C) Look at the age of the manager’s account. Usually, a PAMM manager is required to have past history that can be used to evaluate performance prior to selection by investors. A trader who has stayed profitable for up to a year and even more is one who can be trusted with a PAMM account.

How to Setup a PAMM Account

The trades that are setup by PAMM managers will more likely be short term in nature in an attempt to maximize profits and keep up with the payment schedules, which are usually made monthly.

Here are the steps that are followed in setting up a PAMM account.

 Step 1

The manager creates a PAMM account with a broker that offers the PAMM facility. This is the Manager’s Capital. The manager will trade this account for a length of time and aim to make it profitable so as to attract investors. Trading can go on for as little as three months and as much as 1 year.

 Step 2

The manager is enlisted into the rankings system, and can request investors to invest in the PAMM account. Parameters such as manager’s compensation, investor’s compensation and payout schedules are set. The total ratio used for computation of percentage allocations is always 100%. The contributions of each investor and the manager are divided by the total sum of money contributed by all, multiplied by 100 to get the percentage allocation for each party in the PAMM agreement. So if a manager and two investors contribute $3,000, $5000 and $2,000 respectively, the ratio of allocation will be 3:5:2. Any profits made are split in that formula.

 Step 3

Any profits are divided along the lines of the profit sharing formulae agreed on between the manager and the investor. The manager’s capital must stay intact. If money is made, profits are shared. Investors must also pay the PAMM manager the agreed manager compensation from their respective profits. If losses are sustained, the manager must commit to recovering the lost capital. At this time, no profits are shared and the manager gets nothing until the original capital used in starting the PAMM account (i.e. manager’s capital + investors’ capital) is fully recovered.

Investors can register with more than one PAMM provider. Investors who decide to exit a PAMM investment can do so at the time that has been agreed on between the manager and such an investor prior to commencement of the PAMM cycle.

What Kind of Investment Option Does PAMM Trading Provide?

PAMM is built to work for managers and investors alike.

For managers, a PAMM account is a vehicle to monetize trading skills and make extra money. It takes the same level of effort to make $200 from $1500, as it does to make $2,000 from $15,000. The percentage gain is the same, but the monetary value of both investments is different because more capital was used in the second instance. Additional capital that can be used to make extra money for each percentage gain is the main benefit that a PAMM account brings for managers.

For investors, a PAMM account is an alternative form of passively investing in the financial market. The only work that needs to be done is the selection of the PAMM manager.

Precautions

Just as with any investment vehicle, there are precautions that must be followed, especially by those who are investing money in a PAMM account.

A) Do not submit your funds to managers that use very risky strategies. To the untrained eye, detecting a trader who uses too much risk cannot be achieved. But to the initiated, this is easy to detect. Look at the performance charts for that manager. If there are wild swings in between trades, or the profit charts are extremely steep, then this manager is probably using a risky strategy.

B) Try to ascertain whether the manager uses manual trading techniques or an automated strategy. Many robots can be unpredictable, giving good results one month and then completely turning an account inside out another month.

C) Balance your risk. Smaller allocation of capital should be made to PAMM accounts which have managers that trade more aggressively, and higher amounts should go to PAMM accounts with more conservative managers.

D) Do a periodic re-evaluation of managers. If you use more than one PAMM manager, you would do well to re-evaluate them constantly. Exit PAMM accounts where manager performance has begun to drop off.