The forex market is a huge financial entity, and one that is deceptively complex and contains a wide range of terms of jargon.
Terms such as margin and leverage are particularly important, of course, but there are other examples of jargon that can help to shape your currency trading experience and potentially lead to increased profit margins.
Take a PAMM account, for example, which is relatively unknown despite offering tangible investors to certain traders. But what is a PAMM account and how exactly does it work?
What is a PAMM Account?
The acronym ‘PAMM’ stands for ‘percentage allocation management module’, while this type of account may also be referred to as ‘percentage allocation money management’.
This represents a form of pooled money for forex trading, which enables an investor to allocate their money in a predetermined proportion to a qualified trader or money manager.
From here, participating money managers and accredited traders are able to manage multiple forex accounts using a combination of their own capital and pooled resources, with a view to generating profits for all parties.
PAMM brokers typically manage these segregated accounts through a single trading platform, through which they can access an often significant fund that can be distributed across a diverse range of assets and marketplaces.
How Does a PAMM Account Work?
To understand how this works, let’s take a simple example. In this instance, a forex broker, money manager and three investors are contributing to the account, with the latter hoping to achieve viable profits through currency trading.
However, these three investors simply don’t have the time to invest in individual trading activities or an underlying knowledge of the marketplace, so they join in with a PAMM account to leverage the expertise of a professional money manager (or trader).
After the investors and money manager in question agree to a Limited Power of Attorney (which see the former agree to assume the risk for the forex trades and strategies placed), their contributions are then invested into the fund and pooled to trade forex.
The capital is then invested according to the manager’s precise trading strategies and methodology, who subsequently charges a fixed percentage of any profit made (this will usually be 10% of its cumulative value).
As for the investors, their returns will be distributed according to their precise contribution, making it easy for them to calculate a viable risk/reward balance.
Who Should Use This Type of Account?
As we’ve already touched on, this type of account is more suitable for aspiring traders who lack the time to research the market or execute orders (despite boasting the requisite capital).
However, it may also prove alluring for novice traders of all descriptions, particularly those who want to generate a relatively quick profit as a secondary income stream.
We’d definitely recommend that you enter into this type of agreement with at least a basic understanding of the forex market, however, so that you can comprehend its basic functions and calculate your potential returns more effectively.
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