Financial markets are becoming more trader-orientated, lowering the barriers for more users to join, including beginners and those who want to make some short-term gains and achieve personal objectives.
Brokerage companies offer custom trading tools, accommodating the increased demand by newbies and basically anybody with internet access. Traders can either rely on their experience to execute orders or use managed account services that automate the trader’s activities.
For example, PAMM and MAM accounts entail assigning a money manager who trades on behalf of the user, while trader copying is the process of applying an expert’s trading system in the hope of getting similar profits.
Let’s discuss how traders can utilise these managed account services and the features of PAMM, MAM and copy trading.
Growth of Managed Trading Accounts
Managed trading refers to investing accounts that use a money manager; a financial expert with years of experience in financial trading markets seeks profitability and makes trading decisions on behalf of the original users.
Users and money managers enter into a legal agreement backed by the brokerage firm, which entails the delegation of investing decisions to the money manager using the trader’s funds.
Investors have the freedom to choose who manages their accounts and check their portfolio, trading style and system before agreeing with them.
However, the system structure and degree of flexibility vary between PAMM and MAM accounts. On the other hand, copy trading is more straightforward and does not require signing any legal documents.
PAMM
The percentage allocation management module is a system where multiple traders pool their funds together and assign a money manager to trade with the pooled capital. The trading manager starts investing and making decisions for an agreed period of time.
Then, profits are distributed among participants according to their proportional contribution. For example, if John participates in a PAMM pool with 15% of the overall capital, he will gain 15% of the generated profits.
Why Choose a PAMM Account?
PAMM accounts are not very recent, and its models and system have developed enough to make it a reliable and valid trading option for those with limited trading know-how.
Many traders who lack hands-on experience prefer PAMM accounts where they can entrust a highly skilled and knowledgeable manager to trade on their behalf, guaranteed by a binding contract.
Additionally, money managers are obliged to participate in the PAMM money pool, minimising any conflict of interest and ensuring that managers act in good and pursue their financial benefit in making investment decisions.
Challenges of PAMM
Despite the multiple benefits of trading with PAMM accounts, they come with some challenges, especially for those with limited budgets.
Traders in one PAMM pool may have different risk tolerance, which can be problematic for risk-averse investors. Moreover, the money manager may have acquired their successful portfolio by taking risky decisions and entering into high-value positions.
However, this risk level may not fit every trader, and the chance of losing balance becomes higher.
Another challenge associated with the PAMM account is flexibility and withdrawal from the pool. Most of these agreements impose fines if a trader decides to exit the pool, and they cannot affect or change the trading strategy during the contract activity period.
MAM
The multi-account management system may look similar to the PAMM account. However, some features differ between both trading styles.
The MAM system consists of multiple traders’ accounts, called sub-accounts, which are all connected to a money manager’s account, called the master account.
The trading expert makes decisions on their master account, which are replicated to each connected sub-account. Similar to PAMM accounts, profits are shared among participants according to the percentage of their contributions.
The benefits of MAM Trading
Trading platforms strictly filter and analyse money managers’ portfolios before admitting them to the MAM program, ensuring they demonstrate a legitimate and valid knowledge of trading managed accounts.
The main advantage of MAM accounts is the ability to change a sub-account trading style, order books or trading volume. Participants can edit these parameters in their sub-accounts to avoid losses and significant risks.
Challenges of MAM
MAM programs pool traders with different risk tolerances; some of them may be willing to take additional risks to generate higher profits, while others may be comfortable with moderate investments to make steady incomes.
Additionally, MAM managers usually charge high fees for their services, and if the trading session does not generate enough returns, these fees may offset any gains made. Even worse, manager fees may outnumber the amount invested in the MAM account, taking from the main balance.
Copy Trading
Copying another trader’s strategy is a common feature that many brokerage platforms offer. This way, users can choose an investment system from the trading software and choose a preferred one.
Users can review the trading style, markets, assets, risks and other features before copying the strategy to their charts.
Benefits of Copy Trading Accounts
Copy trading is easier to get hands-on than PAMM and MAM and does not require entering any legal agreement with a third-party manager. Traders can directly copy a portfolio and seek financial gain.
Copy trading is highly customisable; a trader can switch between strategies and choose different systems from the software anytime.
Risk of Copy Trading
The downside of copying another trader’s profile is the reliance on ready strategies, which hinders the investor’s learning curve.
When an investor cannot develop their own trading strategy and style, it becomes harder for them to make decisions if technical failures happen or markets move unexpectedly.
Final Remarks
Managed trading accounts, such as MAM, PAMM and copy trading, are becoming increasingly popular among beginner investors who have limited time and knowledge to make trading decisions.
Each style has different characteristics, features and risks. Therefore, choosing the right system requires thorough research and complete awareness of one’s budget and risk tolerance.
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