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For traders who may not wish to be directly involved in every aspect of trading, a couple of the most popular choices available are to engage in copy trading or open a PAMM account.
Both are frequently available from top forex brokers and are distinct types of trading that differ in many key areas.
The experts at InvestinGoal have looked at both copy trading and PAMM trading, analyzing the fundamentals of each alongside some of the main advantages and drawbacks to help provide as much insight as possible to traders choosing between the two.
Table of Content
What is PAMM Trading? – The Fundamentals
A PAMM account is a type of trading account in which there are typically three parties.
An investor, a broker, and a fund 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.
Popular brokers providing PAMM accounts are:
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 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 fund manager usually takes a commission on 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 that many brokers make available to maintain an overview of your account status and monitor any trades made by the manager you have authorized.
Advantages and Drawbacks of PAMM Trading
Naturally, as with any form of trading, there are positives and some tradeoffs 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.
- Opening a PAMM account can be a simple and hassle-free way to engage in forex trading.
- You are engaging the skills of an expert trader who likely has a wealth of experience to back their ability.
- 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 commissions. In this sense, you are paying for potential success without any fixed guarantee.
- 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 a popular form of trading that involves directly replicating the trades of other traders in the market.
Key elements which need to be present in order to facilitate copy trading are:
- A copy trading platform that allows copy trading to be performed, such as eToro, ZuluTrade, or NAGA Trader.
- Another trader, or signal provider from whom the trades will be copied.
(74-89% of retail CFD accounts lose money)
In copy trading, there are three counterparts. These are the trader, the signal provider, and the broker offering the service (such as eToro).
When the signal provider opens a position, the broker analyzes it and matches it with the preferences of investors who want to copy trade.
The main difference with a PAMM account is that the trader, while copying a signal provider, has the power to choose when and how to copy a position, and retain full control over their funds.
(78% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you can afford to take the high risk of losing your money)
Advantages and Drawbacks of Copy Trading
There are a number of key points to consider prior to engaging in copy trading.
- You will have the ability to follow and implement the trades of expert forex traders who possess a proven track record of success.
- The trading platform can automatically implement your choices; therefore, the workload can be reduced.
- No precise market or forex trading knowledge is required since all of the key decisions are replicated from the signal provider.
- Ultimate control over capital investment and the ability to change the parameters stays with the investor
- You are reliant on the continuing success of other traders. This is something that can never be guaranteed.
- Despite not directly trading, the ability to analyze signal providers, pick the right ones, and create a balanced portfolio is still required.
- Copy trading spreads can be slightly higher than usual.
- Commissions from brokers will vary and fees may depend on the success of a signal provider.
- Control over trades and outcomes is ultimately given up by the copier.
- Patience and a long-time horizon on investment are often needed.
PAMM vs copy trading: which one should you choose?
Both are effective methods of generating a passive trading income if applied correctly, and they share many of the same attributes.
Almost every major broker offers 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.
The main point to consider is how much the investor is willing to give up control of their funds.
With a copy trading account, the investor can make decisions, this is not possible with a PAMM account. In fact, with a PAMM account, the money will be entrusted directly to a professional, who will use it (along with those of other investors) to open and close operations.
Another difference is commissions. With a PAMM account, there is often only one fee, the standard spread that the fund manager pays for opening trading positions. With copy trading brokers, however, there will be the spread and a commission charged by the copy trading platform.
PAMM vs copy trading is a comparison between two 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 that 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.
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