At a glance, PAMM and copy trading may look the same due to the many similarities. So, what are the differences between the two, and which one is more profitable?

Unlike the stock market, whose operation can be traced back to centuries ago, forex market that we know today is actually relatively new. And yet, it has successfully become the largest and the most liquid financial market in the world right now. Especially once the internet took hold of the market, real-time forex trading became possible and thus, convinced millions of investors from all around the globe to participate.

PAMM Vs Copy Trading

In forex trading, there are various approaches that are often used. Every trader has a purpose and therefore, needs different strategies. As a result, most brokers today compete to offer the most variable and profitable account types for online investing.

One of the most interesting ideas is how traders can now use forex trading as a passive income through the skills of other more accomplished traders. This option is excellent for those who do not feel comfortable trading on their own, perhaps because they're still newbies or don't have much time to trade.

There are two account types that offer such convenience, namely PAMM and Copy trading. Both are types of managed accounts that involve the replication of trading strategies by an experienced trader to the accounts of those subscribed to them. This makes them pretty similar and sometimes it can be hard to distinguish the two.

Through this article, we're going to focus on understanding the difference between PAMM and Copy trading, along with the benefits and risks, as well as seeing which one is better than the other.

Contents

 

What is PAMM?

Percentage Allocation Management Module (PAMM) is best understood as a managed account that allows its owner to a designated "money manager" from a broker where their strategies are automatically copied onto the account holder's platform.

In other words, investors basically trust their money to these expert traders and let them trade on their behalf. The trade execution is purely up to the money manager who would make the trading decisions, based on a broader parameter requested by the investor. The result will be presented once it's available and the investor will then have to accept any profits or losses gained from the trade.

Moreover, all connected investors' balances are accumulated and copied to the money manager's account before being executed in a trade. That means, the money manager doesn't have its own balance, but only a virtual balance in the amount of all connected accounts. Then, like the name, PAMM uses a percentage of allocation for the profit distribution depending on the number of participants in the pool. So for instance, if there are four people in the pool, then each person would receive 25% of the profits minus the fee for the money manager.

Meanwhile, the broker's main role is to connect the investor with the money manager. They would provide a platform where investors can choose the money manager and the assets to trade, along with a number of tools. These tools can be used to show an overview of the investor's account status and monitor the trade. For this reason, usually, broker will be entitled to a small fixed fee or commission.

One thing to remember is, since the investor has no control of the trade once it's executed, it's highly important to pick the right money manager. The investor can from many candidates on the platform. Normally, they would add their track records on their profiles, so it's highly recommended to choose one with upstanding past performances.

It's also worth mentioning that the investor can't trade themselves with their PAMM account because it would affect the percentage allocation. However, it's possible to detach from the money manager at any time.

 

The Advantages

  • There's no need to be an expert to open a PAMM account. This can definitely save some time and effort depending on the goal that the trader's trying to achieve.
  • Opening a PAMM account can be an easy way to enter the forex market without actually engaging directly.
  • Since the money managers are usually experts, the chance of success is higher. Hence, PAMM can offer a passive income especially for beginners or busy traders.
  • PAMM is highly transparent since the trader can choose who to work with and which asset to invest in. This also increases the safety of the trade because both the brokers and money managers need to be compliant.

 

The Disadvantages

  • There's a risk that the trade might not work out and the trader needs to take the consequence regardless of the result. If you end up in a loss, you must accept it and still be required to pay the money manager's fee.
  • The more expert the money manager is, the higher the fees and commission. Even so, there's still no guarantee that the trade will be successful.
  • Traders have zero control over the trade once it's executed. The trader must fully trust the money manager to do all the work and bring generate some money back.

 

What is Copy Trading?

Copy trading exists under the umbrella of "social trading", which basically means involving the traders to be social and interact with each other. On a social trading platform, new traders can interact with experts, ask questions, learn how they do their trades, and even watch their trades in real-time.

As the name suggests, copy trading allows traders to copy or replicate the trades of successful traders and use the strategy as their own. Similar to PAMM, traders can choose whose strategy to copy and collect the profit or loss once the trade is done. Traders will also need to pay a commission to the expert, regardless of whether they manage to earn profit or not.

In copy trading, brokers play an important role to provide a trading platform that will display the entire process of the trade execution automatically. The first thing they offer is a list of experts to choose from, in addition to in-depth metrics on their past performances.

Once the trader makes a decision, the replication process will begin immediately once the trades have been executed by the expert or signal provider. The trade will be executed automatically based on the trader's desired ratio and boundaries. In the end, you need to find a suitable broker to support your strategy. 

When it comes to trading costs, typically the broker and signal provider will take the commission straight from the spread paid by the trader for each trade. This is why the spread in copy trading is mostly more expensive than regular ones. Alternatively, some experts also accept a fixed fee based on the agreement with the trader.

 

The Advantages

  • Traders get the chance to follow and duplicate the trade of expert traders with undebatable success in forex trading.
  • The trades are automatic, so it doesn't require much effort to execute.
  • No trading expertise is needed to open an account because the trader simply chooses a strategy from a signal provider and copy it on their own portfolio.
  • Traders can follow more than one signal provider, which is not possible in PAMM.
  • The trader still has the ultimate control over the capital investment and is allowed to change the parameters any time they wish.
  • It's possible to choose different strategies and execute them simultaneously to diversify one's portfolio. This can reduce the risk level and make a greater profit.

 

The Disadvantages

  • There is no guarantee that the trade will be successful. The trader must fully rely on the strategy to get the profit.
  • It's not easy to pick the right strategy to copy. One needs to be able to analyze signal providers, the right ones, and build a balanced portfolio.
  • The spread in copy trading is usually higher than average.
  • Different brokers offer different commission rates, which usually depend on the success rate of a particular signal provider. By choosing a high-level strategy provider, traders might pay more only for increased chances of success. There's still no guarantee that the trade will be successful.

 

What Makes PAMM and Copy Trading Different?

At a glance, we can see that PAMM and copy trading are mostly similar in nature. Both are meant to provide passive income for traders who are either too busy to trade or simply still lacking in trading knowledge.

Nonetheless, PAMM and copy trading are not the same. PAMM has been around for a lot longer, while copy trading has been gaining traction in the last few years. The main objective of both accounts is essentially the same, but if we take a closer look, there are two important key differences to take note of: the control that the investor has and the allocation system of the profit.

PAMM uses a pool system where several investors connect and invest in a money manager to trade on their behalf for a specific trading period (at least a month). The investor should also agree with the terms and conditions of the pool and withdrawing will usually cost them some penalty. This shows that they don't have much power over the trade, but it's perfect for those who don't think much about the investment and just happily wait for the end result.

On the other hand, copy trading gives more control over the investor's portfolio because it allows them to withdraw without any consequence. Investors can invest for as long as they desire and quit at any time without penalty. Also, in copy trading, the investor's money never gets to any third party's hands, so they can use it freely.

Lastly, the potential profit for PAMM and copy trading is also different. As mentioned above, PAMM uses a pool system where the profit will be divided based on the investor's percentage allocation. In contrast, the profit share in copy trading depends on the performance of the person being copied. Although there are pools for the experts in copy trading, it won't affect the individual investor's profit.

 

Conclusion

Each option essentially has its own benefits and downsides. Hence, there is no ultimate answer of which one is better than the other. But when it comes to choosing the one to use, the answer should go back to you and your personality as an investor. Some factors like trading cost and the broker's offerings should also be considered. In the end, whichever type you'll end up choosing, make sure that it matches your goal and preferences.

Don't forget to build a balanced portfolio and do research before making any crucial decision in order to be successful in your trading career soon.