How to create passive income online with PAMM accounts
With development of online trading Forex has become a booming investment niche. A lot of people looking for ways to make money online prefer to invest in currencies, and the most cost-effective way to do it is through a discount Forex broker. It is very easy to open an account and start trading currencies. However, to trade successfully and make profit on Forex you need to spend a lot of time learning fundamental and technical analysis and basic rules of investment in general. Being on forex without a trading advisor or trading robot requires you to spend time daily on following market news and price changes. For a busy modern investor this could become a serious problem. Luckily, there are a lot of options available for people looking to create passive income online on Forex. Today we are going to take an indepth look at how to invest in PAMM account and its advantages and disadvantages.
How PAMM accounts work?
The abbreviation PAMM stands for percentage allocation money management, or percentage allocation management module. But don’t let the complicated meaning scare you away in an essence invest in PAMM trading means trust another person to manage your portfolio or a part of it in exchange for a certain percentage of profit. A managing trader usually invests some of his or her money and combines that with the money from accounts of other people. It is considered a form of pooled money trading. PAMM systems are usually organised by Forex brokers. When experienced traders register as PAMM managers they are added to the brokerage’s database. Other clients can compare their performance and choose which PAMM-trader they want to trust their money. Unlike money managers, PAMM traders are not required to have a license. Prior to allocating their money to PAMM trader investor must sign the agreement stating that he accepts the risk connected with trusting his money to another trader of his choice. The PAMM trader agrees to make best effort to trade profitably and responsibly, following his own trading strategy or style. This agreement also specifies which part of an investor’s portfolio is being hand over to a trader.
PAMM accounts may be hard to understand at first, so let’s review how this works on an example.
- James wants to make money on forex, but has no experience.
- Paula also wants to make money on forex, but doesn’t have time for it.
- Alex is an experienced trader looking for ways to increase his profit.
- All of them have accounts with ABC Forex Brokerage, which offers PAMM-system.
ABC Forex Brokerage has a database of over 100 registered PAMM-traders and Alex is one of them. Let’s assume that both Paula and James decide to invest in PAMM account. Both hire Alex for managing their accounts.
Alex already has $3000 on his account, Paula adds $1000 and James adds $2000, now the total amount of money under Alex’s management comes to $6000. Alex owns 50% of it, Paula 16,7%, James 33,3%. Now Alex can continue following his investment strategy but with larger portfolio.
All profit is shared with everyone in the pool according to the size of their share, minus part of profit that Alex keeps for his services. During first month Alex manages to grow an account by 20%. That means an increase of $1200 over the initial $6000. Total amount of money in the pool is now $7200. Alex receives 10% of profit for his service ($120) and rest of money are shared among all pool participants:
Total profit minus Alex’s commission: $1200 – $120 = $1080
- Paula’s profit: $1080 x 16,7% = $180,36
- James’s profit: $1080 x 33,3% = $359,64
- Alex’s profit: $1080 x 50% = $540
Now investors can decide whether they want to continue trading with Alex or take all or part of their money away.
Let’s imagine the case where James and Alex take away their profit and Paula don’t. Then there is another investor Julius, who also wants to invest in a PAMM-trader, he chooses Alex and contributes $1000. Now the size of everyone shares needs to be recalculated.
Total money in the pool: $7180,36
- Paula: $1180,36 – 16,4%
- Alex: $3000 – 41,8%
- James: $2000 – 27,9%
- Julius: $1000 – 13,9%
Next time profit will be shared according to these share sizes.
What happens if PAMM trader’s actions lead to a loss?
Next month Alex fails to make any profit and loses 10% ($718,03). This means no compensation for Alex’s work. Then, everyone’s share is reduced proportionally to amount they now invest in a PAMM account.
Total money in the pool: $6462,33
Loss: $718,04 x 16,4% = $117,76
Remaining capital: $1180,36 – $117,76 = $1062,6
Loss: $718,04 x 41,8% = $300,14
Remaining capital: $3000 – $300,14 = $2699,86
Loss: $718,04 x 27,9% = $200,33
Remaining capital: $2000 – $200,33 = $1799,67
Loss: $718,04 x 13,9% = $99,80
Remaining capital: $1000 – $99,80 = $900,2
If everyone decides to continue trading with Alex and keeps the same amount of money in the pool, their shares won’t change.
Advantages of PAMM-trading
PAMM-trading let’s traders create passive income online in a more or less secure environment. Of course, Paula, Alex and James from the example above could have had a direct agreement between each other. But without a broker Alex’s performance would be harder to monitor and the process of dispute resolutions becomes much more complicated (What if they don’t agree on share sizes? What if Alex takes off some of the money? etc.) A broker in PAMM-trading guarantees that Alex’s trading stats are disclosed to all members, that other people’s money won’t be taken out from an account and that profit and loss would be shared according to an initial agreement. Another advantage of PAMM-trading with Forex broker is a number of PAMM-traders to choose from. Without it, finding qualified portfolio managers and verifying their experience yourself becomes more problematic.
Disadvantages of PAMM-trading
In most countries PAMM-trading lacks clear rules and regulations. Classic money managers are req uired to obtain a license, but this is not the case with online PAMM-trading. If you are looking to invest in PAMM-accounts, make sure PAMM-traders are prescreened by a broker to make sure they have enough experience and can run a stable balanced strategy for a long time.
If a PAMM-trader is successful, he keeps a large part of the profit as a compensation for his services. But if he is making wrong decisions and losing money, he is not paying anything extra from his own money, but losing an equal share of everyone’s money in the pool. Stay careful and select a managing trader that has large portion of his own money in the pool (around 50% or more). If a trader himself has only invested 10%, he might be tempted to run a more risky strategy because his personal risks if he lose money would be too low compared to potential compensation if he makes money.
There are other ways to create passive income online and make money on Forex without spending too much time on it. A dedicated money manager may be able to work out a better investment strategy, taking into consideration your individual goals and needs. But such manager will most likely charge more then a PAMM-trader. Copy trading or signal provider platforms work in a similar way to a PAMM-system, but in this case you don’t have to hand the money over to somebody else. In copy trading all trades of a signal provider are copied to his followers accounts automatically. The price can vary from $0 to several hundred dollars per month (free through MyDigiTrade). The amount of control over the copying process and the precision with which trades are being copied depends on the service provider.