There you go, you are an investor, you want to be rich without learning Forex a-z simply because you don't have the time to do so. Enter Forex PAMM, yes, you can enter Forex industry without a single know-how, but the biggest question is... Will it make investor rich?!
There you go, you are an investor, you want to be rich without learning Forex 101 simply because you don't have the time to do so. Then someone offered you to join forex PAMM. He said, yes, you can enter the Forex industry without the know-how (well, probably a little bit). But the biggest question is... Is forex PAMM profitable for investors?
Forex PAMM stands for Percentage Allocation Management Module. As written on the tin, your invested capital is bound to be allocated by a fund manager who runs his own capital and his investors' capitals.
See also: Forex Brokers with the Lowest Deposit
You know, it's like handing over your faith to a reverend, except that this faith is pretty much tradeable and thus profitable.
How It Works
Forex PAMM service would always converge several parties to partake, they are:
- Forex Broker
- Traders (or in this case, fund managers)
Let's say an expert trader, named after Soros, agreed upon term and condition imposed by ABCFX (fictional firm) broker and thus registered as one of their Forex PAMM fund managers. Soros then advertised his current trading portfolio to attract investors, and boy! It worked!
Two investors signed an agreement with ABCFX to invest under a certain term which enabled them to join the same program. They dumped their sizeable funds for Soros to kickstart his trading wonder.
Notice that these two investors came about with substantially different budget allowance. One such investor, namely Hitler, invested USD 50,000 compared to a random Bonobo that could only afford USD 1,000. On top of that, Soros ran his own USD 15,000.
Now, let's do the math (I promise, I'll keep it as stupidly simple as humanly possible)
The first thing investors need to know is the total amount of invested funds.
Total invested fund = Soros capital + Hitler capital + A random Bonobo capital = 15,000 + 50,000 + 1,000 = USD 66,000
Please note that the percentage of each fund to total invested fund do play a huge part in this role as each profit or loss will be accounted according to it. After all, that's why P in Forex PAMM stands for percentage.
Soros' percentage = Soros own fund/total invested fund = USD 15,000/USD 66,000 = 22.7 percent
Hitler's percentage = USD 50,000/USD 66,000 = 75.8 percent
A Random Bonobo's percentage = 1.5 percent
Let's say, Soros actually lived up to his trading wonder, he made 25 percent profit in his first trading term (can be monthly or weekly, up to parties agreement) which netted him USD 16,500, tallied up the total invested pool to USD 82,500 (66,000 + 16,500)
And let's not forget that Forex PAMM fund manager would actually charge investors with a fee that's completely up to them to set. So, let's say Soros was rather charitable and set his fee to 5 percent of the profit gained within a trading term.
Soros' Fee = 16,500*5 percent = USD 825
The remaining profit which was USD 15,675 (16,500-825) would then be shared according to each investor's percentage, like so:
Hitler's profit = USD 15,675*75.8 percent = USD 11,882
A random Bonobo's profit = USD 15,675*1.5 percent = USD 235
Soros' profit = USD 15,675*22.7 percent = USD 3,558 (wait, what? He got profit on top of his fee? Yes, in Forex PAMM each registered trader is also counted as a single entity of investor)
As you can see, Hitler as the top investor also got the most share out of it (quantitatively speaking), while that random Bonobo...well, he only deserved to get the breadcrumbs. In other words, if you want to be a rich investor, consider dumping more money to your faith-bound reverend, ehm, a Forex PAMM fund manager.
What Happens If Your Fund Manager Loss the Trades?
That would anger Hitler for sure as he would suffer the most loss as well.
No question asked, Soros didn't get his trading fee after his loss (he's lucky enough to escape alive, though).
The impact of losing trade savagely cut the total invested fund. So, if Soros made a 30 percent loss, it would also drain the previous collective funds (including total profit made on previous trading terms) by 30 percent as well.
Speaking about number crunching, it's like Hitler would send a load of army to terminate Soros. So, uhm, yeah, here's the number anyway:
Total current pool = Total invested pool + profit/loss on previous trading term = USD 66,000 + USD 15,675 = USD 81,675
Total loss = Total current pool*Soros' Loss on a trading term = USD 81,675*30 percent = whooping USD 24,503
That total loss would be spread according to each investor accumulated fund (initial capital plus previous profit or loss) minus the loss percentage. Again, that's why P in forex PAMM stands for.
Hitler's loss = accumulated fund*loss percentage = 66,882*30 percent = USD 20,065.
Soros' loss = 18,558*30 percent = USD 5,567
Bonobo's loss = USD 371
As you can see, Forex PAMM can actually provide humongous profit if you invest on a titanic level (just like Hitler). However, it also carries out potential huge risk every single investor should be aware of.
At the end of day, you may not need to learn intricacies of Forex trading, thanks to Forex PAMM. But hey! Now you need to scrutinize one and each of available fund manager and made a leap of faith with them!
Oh, by the way, Hitler made decision to desert his failed fund manager and switch to spanking brand new one, his name is Mr. Belfort (aye, that one man).
Here Comes the Broker
Up to this moment, there are several lines of major retail forex brokers providing PAMM services, their basic features generally include:
- Security: fund managers can not withdraw other investor funds. It's safe and locked.
- Access: investors can assess fund managers' trading portfolios and track records. Each broker may come up with different interface and statistic view.
- Risk Diversification: there goes a saying, don't put all your eggs on a basket, it also applies to Forex PAMM fund managers. Investors are recommended to split their invested funds to some of the top traders.