What is a PAMM account in simple words?

A trader opens a PAMM account to offer investors the management of their funds. After that, anyone can invest money in his trading and earn profits together with an experienced trader without trading independently.

A PAMM account is a special trading account of a trader in which investors can invest their money. After that, the total funds participate in trading, and the profit received is distributed proportionally. Part of the investors’ profit is transferred to the trader as a reward. PAMM-account works on the broker’s platform and all calculations take place automatically.

Why do you need PAMM-accounts?

Have you ever thought about how to increase your savings? Perhaps you are already investing in banks or real estate, buying stocks or bonds, investing in mutual funds, or investing in everything at once.

For a long time, the Forex currency market was inaccessible to a wide range of private investors. Independent trading on it requires serious training and experience – according to statistics, less than 5% of traders make a profit after the first year.

PAMM-accounts allow a private investor to transfer funds to the management of an experienced trader through a transparent and secure brokerage service. When investing in a PAMM account, the investor transfers money to the trader and gives a part of his profit for it.

Traders PAMM-accounts give an opportunity to attract investments and earn additional profit on their trading.

Example of investing in a PAMM account

Let’s consider all the main stages of PAMM account operation on the example of investing in PAMM account Hohla USD.

1. Manager opens a PAMM-account

Everything starts with the manager opening a PAMM account with a broker. To open a PAMM account, a trader must register, be verified as a PAMM manager, deposit at least $300, create and activate an offer for investors.

PAMM account Hohla USD was opened by the manager on Alpari on May 31, 2013. According to the offer created by the manager, he takes 20% of investors’ profits as a management fee of $1,000 or more.

2. An investor finds a PAMM-account manager

An investor usually finds PAMM-accounts by recommendations or in the public rating of PAMM-accounts.

Alpari PAMM Account Rating — convenient way to find a PAMM account based on its performance. In the PAMMin rating, reliable PAMM accounts are manually selected, the profitability is calculated taking into account remuneration payment. For each PAMM account the average annual return and the maximum historical loss (drawdown) are displayed.

3. Investor invests in a PAMM account

All operations with real money are carried out through the Alpari broker. To invest in a PAMM account, you need to register with Alpari and fund your account. 

You can start on a demo PAMM portfolio on the Pammin website (there are no demo PAMM accounts on Alpari). In this case, you can learn how PAMM accounts work without risking real money.

For example, let’s invest in the PAMM account Hohla USD 1000$ (for a more detailed description of the investment procedure, see the article «How to invest in a PAMM account»). “How to invest in a PAMM account”).

Initial data of the investment account:

Balance: 1000$
Funds: 1000$
Manager’s commission: 0$
Pure funds: 1000$
Pure profit: 0$
Profitability: 0%

Investment account data after 1 month:
(prior to payment of the receiver’s commission):

Balance: 1000$
Funds: 1100$
Manager’s commission: 20$
Pure funds: 1080$
Pure profit: 80$
Profitability: 8%

Investment account data after 1 month:
(after payment of the receiver’s commission):

Balance: 1080$
Funds: 1080$
Manager`s commission: 0$
Pure funds: 1080$
Pure profit: 80$
Profitability: 8%

At the end of the second month, the funds are less than the balance, so the manager’s commission is not accrued and will not be accrued until the funds exceed the balance, i.e. until the manager brings the PAMM account out of drawdown.

Investment account details after replenishment:

Balance: 1180$
Funds: 1126$
Manager’s commission: 0$
Net funds: 1126$
Net profit: 26$
Yield: 2.6%

PAMM account offer?

In the PAMM account offer, the manager indicates the percentage of the investor’s profit that he takes for managing the funds. By investing in a PAMM account, you automatically accept its offer. In the future, the percentage specified in the offer will be automatically debited from your profit in favor of the manager.

The offer also indicates the currency in which the PAMM account accepts investments, the minimum investment size and the minimum deposit and withdrawal amounts.

Profit calculation and reward payment occur at the end of the trading interval (once a month) or upon withdrawal of funds. If the PAMM account brings a loss, then the commission is not charged until the losses are covered, i.e. until the PAMM account comes out of drawdown.

A PAMM account may not have a public offer or depositing funds under the offer may be prohibited by managers. In this case, investing in this PAMM account is impossible.

PAMM account offer levels

The offer may have several levels of commission depending on the amount invested (see figure). The more invested in a PAMM account, the smaller the share of profit goes to the manager. The amount of invested funds is calculated according to the balance of your investment account.

Changing the PAMM account offer

The terms of the offer are fixed when the investor opens a managed account and are valid until it is closed, even if the manager changes the offer during this time.

Once you have invested in a PAMM account, the manager can no longer worsen the terms of your offer. The manager can change the percentage of remuneration under the general offer of a PAMM account, but your conditions will not change until you close the investment account.

How does profit depend on the offer?

The manager’s commission greatly reduces the investor’s expectation, so when choosing a PAMM account, you need to evaluate only the net profitability, taking into account the monthly payment of the manager’s commission. Profitability taking into account the offer may even become negative.

A simple example. We invested $1000 in a PAMM account with a manager’s commission of 50%.

1st month

PAMM account profitability: +10%.
Investor funds: $1100
Net funds (including commission): $1050
Net profit: $50

2nd month

Profitability per month: -5%.
Total return excluding commission: 1.1 * 0.95 = 1.045 or 4.5%
Investor funds: $1050 – 5% = $997.5
Net funds (including commission): $997.5
Investor net profit: – $2.5

As a result, the PAMM account chart without commission will show +4.5%, but in fact, taking into account the offer, the investor will receive a small loss. In  the Pammin rating of PAMM accounts  , we calculate the net profitability of a PAMM account, taking into account the payment of the manager’s commission for the selected investment amount. This is a more accurate assessment of expectations for planning  investments in a PAMM account .

Profitability of a PAMM account depending on the amount of investment using the example of the  Stability Super Turbo PAMM account :

Risks of investing in PAMM accounts

It is known that risks accompany any investment. PAMM accounts are no exception; moreover, the risks of PAMM accounts are higher than those of any bank deposit, bonds and many stocks. Therefore, do not believe if you are promised earnings on Forex without risk, this does not happen, high returns on PAMM accounts are achieved only with the risk of losing part or all of the invested amount. Anyone who offers high income without risk is either a scammer or does not yet have sufficient experience.

Knowing the risks when investing in PAMM accounts, you need to be careful not to lose a lot in vain. At the same time, be prepared for the fact that losses will accompany investing; without this, you won’t be able to make money.

What are the risks of PAMM accounts?

The source of PAMM account risks is, first of all, unprofitable trading transactions of the trader managing the PAMM account. The risks are that the investor fully bears possible losses (drawdowns). If the PAMM account’s profitability graph goes down, then the investor also loses the funds invested in it.

Sooner or later, most Forex trading systems stop working. If a trader does not notice in time that his system has stopped working and does not correct it, he will begin to lose money. His investors will lose money along with him. An experienced trader always tests and updates his systems and disables those that have stopped working. But the investor must also ensure that the PAMM account is normal.

Another source of risk is dangerous trading methods and trading without stops. Many managers use methods such as martingale, grids, averaging and sitting out losses. The PAMM account graph turns out to be smoothly growing with almost no drawdowns. This attracts investors. But if the manager does not use stop losses, you can drain the entire account in one day. This is not always noticeable from the PAMM account chart.

To see such hidden risks, you need to look at the leverage graph, the maximum loss during the day, and the Schwager ratio. Or just choose PAMMs in  our rating . We manually check all accounts for the use of dangerous methods before inclusion in the rating, so the risk of rapid loss for these PAMM accounts is much lower.

How to assess a possible loss?

There are 3 relatively simple ways to estimate how much you can lose on a specific PAMM account. These estimates can be made from public account trading data and do not require specialized knowledge.

1. Stop losses

The first measure of risk is the size of the stop loss or the risk per trade/series of trades. If a trader does not use stop losses on  every  trade, he could lose all his capital in a single leveraged trade on one bad day. There are no stop losses, you can set the risk at 100%.

If there are stops, you can estimate the possible loss from the “black streak” on the account. It manifests itself in how much a PAMM account loses as a result of a series of unsuccessful trades. For example, if a trader sets a stop loss at 5%, this is the maximum PAMM will drop with one unsuccessful trade. If the manager opens 5 such transactions in a row and all of them are unsuccessful, the account will lose 23%.

The risk of a “black streak” or an unsuccessful series of transactions can be assessed by the value of the worst day in history – the maximum loss received during 1 trading session. Imagine 3 worst days in a row and this will be close to a realistically possible drawdown. If the worst day was 10%, you can expect a drawdown of 30%, the worst day is 15% – drawdowns of up to 50% are possible. If the worst day was more than 30%, the manager most likely does not use stop losses and can drain the entire account in one trade.

2. Maximum drawdown

The simplest measure of risk is considered to be the size of the historical drawdown – the floating loss from the last peak in profitability. A drawdown of 50% means that the PAMM account has lost half of its value at its peak.

Max. drawdown is considered a minimal measure of risk. If in the history of a PAMM account there was a drawdown of 50%, then when investing in it, you need to be prepared to lose half of your investment. Obviously, the expected return should be worth it.

But you cannot evaluate the risk of PAMM only by historical drawdowns. A common case for PAMM accounts is when the account grows with virtually no drawdowns and then loses everything in one day. Or if PAMM has only a year of history and this year was successful, the maximum drawdown will not show the real risk; in the future, drawdowns may be much greater. Therefore, another measure of risk is the drawdown declared by the manager.

3. Declared max. drawdown

If a manager trades using a trading system, he probably tested it on history for 5-10 years and knows which system showed a drawdown in tests. He indicates the value of this drawdown in the PAMM account declaration. If there was a drawdown of 20% on the PAMM account chart, and the manager declares 50% in the declaration, you need to focus on a larger value and take not 20, but 50% as a measure of a possible loss.

So, the risks in the case of PAMM accounts are much higher than in other investments. The investor bears the entire risk of losing part or all of his capital. But, nevertheless, this is not a game of roulette – risks can be managed by limiting losses to an acceptable loss limit. Proper risk management is the key to success when investing in PAMM accounts.

You need to understand that temporary losses (or drawdowns) are an integral part of trading in financial markets. A rise is always followed by a decline, and vice versa. And that’s okay. Profitability is formed only after a certain period of time, from many ups and downs, due to the fact that growth is always slightly greater or more often than drawdown.