When it comes to forex trading, there is undoubtedly huge potential at the fingertips of any investor.
Before you can really engage in an effective manner though, it is important to establish the correct foundations and parameters for your trading.
This means, knowing the market and the options which are at your disposal for trading.
Two of the most frequently chosen paths for investors to follow within the forex industry are to open a PAMM (Percentage Allocation Money Management) account or to engage in copy trading through a specified copy trading platform.
Both routes also have positive factors and risk associated. In this piece, we will detail more relating to PAMM vs copy trading, what you can expect from both types and help you to identify which is best suited to your personal trading situation.
What is PAMM Trading? – The Fundamentals
A PAMM account is a type of trading account in which there are typically three parties.
- the investor
- a broker
- a fund manager or trading manager.
With a PAMM account, the investor engages through the broker to set up a trading agreement with a money manager to trade on their behalf.
This type of trading ultimately means that the role of the investor is reduced to just providing the capital for trading on the account. The actual execution of trades is down to the money manager who often trades according to their own discretion within a set of broader parameters outlined by the investor.
When using a PAMM account to trade forex, the knowledge requirement of the investor is lowered significantly, if not eliminated entirely. This is the case since they are just providing the capital and not actively trading themselves.
The role of a broker in the establishment of a PAMM account will usually be to facilitate the connection between a money manager and the investor. It is also possible that they may be working on behalf of the broker.
With this form of trading, the trader usually take a commission on winning trades and in some cases applies a fixed fee for their services. The broker in the relationship will also commonly be entitled to a smaller fixed fee or commission.
As the investor in this relationship, you are free to wait for profit distribution whilst there are also a number of tools which many brokers make available to maintain an overview of your account status and monitor any trades made by the manager you have authorized.
What type of trader are you?
77% of retail CFD accounts lose money
77% of retail CFD accounts lose money
Advantages and Drawbacks of PAMM Trading
Naturally, as with any form of trading, there are positive and some tradeoffs which you may have to consider before deciding to trade through a PAMM account.
- No forex training or knowledge is needed to open an account. This can save a lot of time and effort depending upon your objectives and situation.
- Opening a PAMM account can be a simple and hassle-free way to engage in forex trading. Some liken it to being a silent partner.
- You are engaging the skills of an expert trader who likely has a wealth of experience to back their ability. Hypothetically, this should increase the likelihood of success.
- PAMM accounts are often the most time efficient. This is especially true if you are already in a busy position or environment.
- When compared with trading for the first time, the potential for capital loss can be reduced. This is particularly true if you do not want or have the time to perform the required study before engaging in trades as a novice.
- All of the risk involved with the traders falls on the investor. Money managers and brokers will not assume any liability. As an investor you must be comfortable for several elements of your investment to be outside your control.
- The most successful traders typically charge higher fees and commission. In this sense, you are paying for potential success without any fixed guarantee. Patience and trust is required.
- As an investor, you will typically have no control over the trades which are made. This is all authorized to be carried out by the money manager of your account.
What is Copy Trading? – The Fundamentals
Copy trading is another popular form of trading which is engaged in especially by investors who have many other commitments or are still establishing their own foundations within the forex trading market.
As the name suggests, copy trading in the most literal sense is directly replicating the trades of successful traders in the market.
Key elements which need to be present in order to facilitate the implantation of a copy trading strategy are typically:
- a broker
- a trading platform which allows copy trading to be performed (like eToro, ZuluTrade, NAGA Trader)
- another trader, or signal provider from whom the trades will be copied.
Many brokers will provide this facility through their trading platforms and the entire process can be fully automated and overseen by the investor. First, you will be provided with a number of in-depth metrics tracking the performances of a variety of traders. From this point, you can choose the traders to copy trade from. These are your signal providers and the platform will most commonly do the rest.
The replication process will take place immediately when trades have been carried out by your signal provider. These will be based upon a set ratio which you have choose and the platform will automatically adhere to any other boundaries you have selected.
Usually copy trading brokers and signal providers will take their commissions directly from the spread paid by the participants on each of their trades, and that’s why usually in a copy trading system spreads levels are a bit higher then normal. Alternatively, when performance results have been calculated, the signal provider will be paid the agreed upon commission, percentage or set fee, depending upon your relationship. Usually at any time you, as the investor, have the right to change the trading parameters you have set or to withdraw entirely from a trading position.
With copy trading, whilst the trading platform does automatically perform trades on your behalf relevant to those of the signals provided, you still retain full control over your capital holdings. This is one key difference in PAMM vs copy trading.
Advantages and Drawbacks of Copy Trading
As with PAMM trading, there are a number of key variations to consider prior to engaging in copy trading which may impact your decision.
- You will have the ability to follow and implement the trades of expert forex traders who possess a proven track record of success.
- With copy trading, the trading platform will automatically implement your choices, therefore, the workload is very light.
- No precise market or forex trading knowledge is required since all of the key decisions are operated through the trading platform and replicated from the signal provider.
- You will retain ultimate control over your capital investment and can change the parameters at any time.
- You are reliant on the continuing success of other traders. This is something which can never be guaranteed.
- Despite you don’t have to trade yourself, i.e. you don’t have to be an expert forex trader, in order to be successful with copy trading you still have to develop the ability to analyze signal providers, pick the right ones, and create a balanced portfolio.
- Copy-trades spreads usually are a little bit higher then normal.
- Commissions from brokers will vary. This is often dependent upon the success rates of particular signal providers. Therefore, you could be paying increased fees for increased chances of success.
- Ultimately, you are still surrendering a degree of control over your trades. This is something you have to be accepting of.
- Many professional traders show large profits, but this occurs over a sustained period of time. This requires a lot of patience, especially for new traders. There is no quick fix.
PAMM vs Copy Trading and Which You Should Choose
When conducting objective analysis of PAMM vs copy trading, the first point we must acknowledge is the many similarities between the two. Both are effective methods of generating a passive trading income is applied correctly, and they share any of the same attributes.
Differentiating between the two types and choosing one to progress with will ultimately come down to your personality as an investor along with a number of others factors. These other factors will include the offerings of each broker and how they differ in terms of your target. Almost every major broker will offer these services. It is down to you as a trader to conduct sufficient due diligence in balancing fees and commissions against your free time and goals in trading forex.
One of the key points to consider is the degree of control you want to have over your investment. With a PAMM trading account, this control will be very limited. Usually, the funds are allocated to your fund manager for a set period of time and you accept the results at the end of this period. This method can be most suitable for somebody who wishes to have no interaction at all with their investment and is happy to accept profit distribution when it arrives.
Copy trading on the other hand, offers a greater deal of control to you, the investor. This is predominantly related to the fact that the capital never leaves to any third party. Although it is within use by the trading platform, it is still yours to use as you see fit.
A further key factor to consider is the relative cost of both trading types. PAMM vs copy trading differs in this respect as there are less parties to be included with copy trading. Being facilitated by the broker and trading platform (also operated by the broker), means you should typically only pay out one fee for this type of trading, your broker fee. ON the other hand, with PAMM, you should also pay a certain fee to the fund manager which is usually interlinked with performance. On top of this, it is often also necessary to pay a certain broker fee since they are often performing an intermediary role.
As we can see, PAMM vs copy trading is a comparison between to quite similar forms of trading. Both are very popular in the current market as people strive to balance increasingly busy lives with forms of investment which can be beneficial. It is key though, to understand the nature of both account types and the important caveat remains that no trading is risk free.
Both of these account types make trading much more accessible to the general public and greatly lower barriers to entry which have often restricted new entrants in the forex market, therefore, whichever option you choose, you will still be reaching new heights in your investment career simply by being involved.