Managed Forex Trading provides non-traders the opportunity to conveniently invest without knowing how to trade.
Managed Forex Trading is a brilliant concept that understands the needs of investors who wish to have a more speculative portion of their portfolio. Managed Forex Trading brings options that are available to those investing in equities to those investing in currencies and commodities. The need to learn how to code an algorithm, the pains of learning how to trade, and the extensive screen time associated with manually trading Forex are eliminated. Service providers have went through the trouble already and have verified and well-documented track records for investors to base their investment decisions.
Managed Forex Trading does not offer complete solutions though… there is one donut hole with Managed Forex, but first…
Managed Forex Account Type #1: PAMM (Percentage Allocation Management Module) Accounts
These are pooled money accounts where investors allocate funds of a desired proportion to be managed by fund managers/traders/investment firms of their choosing. This pool of money includes the capital contributions of the fund managers and other investors. Fund managers are compensated with a percentage of the weekly/monthly/quarterly profits earned. Investors may withdraw profits or principal at the rollover period.
In the simplified example illustrated above there was an initial total investment of $500. The PAMM account manager had 60% of the initial total investment and was entitled to 60% of the profits by the rollover period. The investors receive a proportional amount of the profits based on their investment. The investor who invested 20% is entitled to 20% of the total profit. Each investor in the fund receives a return on investment of 200% during this period.
Things get a little more complex with PAMM accounts than the overly simplified situation above. Consider that new investors, profit-taking, and investor exits take place. Also, the PAMM account manager has little reason to offer the service if there is no revenue generated from opening the fund to the public. The PAMM account manager will charge a service fee much like the way a hedge fund would. The PAMM account manager could have turned $300 into $900 without the PAMM.
Let’s give these players in the PAMM some names to personalize them and it make it easier to distinguish between their investment roles.
- Fund Manager Rick creates a PAMM and puts $300 of seed money into it.
- Investor Morty invests $100 into the PAMM.
- Investor Jerry invests $40 into the PAMM.
- Investor Summer invests $60 into the PAMM.
The fund has a service fee of 20%, an early withdrawal fee of 5%, and a Trading Period of one month. After one month, Fund Manager Rick turns a 100% return on investment and the total amount in the account is $1,000.
- Fund Manager Rick now has a $600 total in the PAMM.
- Investor Morty now has $200 in the PAMM.
- Investor Jerry now has $80 in the PAMM.
- Investor Summer now has $120 in the PAMM.
With the fund’s service fee being factored in, Rick will collect a healthy 20% of the profits he earned for his clientele.
- Fund Manager Rick earns $40 in service fees and withdraws them.
- Investor Morty now pays $20 in service fees.
- Investor Jerry now pays $8 in service fees.
- Investor Summer now pays $12 in service fees.
Morty pulls out his $80 of profits, Jerry rolls his profits over, and Summer withdraws her profits. Beth enters the fund and puts in $400.
- Fund Manager Rick now has $600 total in the PAMM.
- Investor Morty now has $100 in the PAMM.
- Investor Jerry now has $72 in the PAMM.
- Investor Summer now has $60 in the PAMM.
- Investor Beth now has $400 in the PAMM.
Rick delivers 50% returns for his clients. The total in the PAMM at the beginning of the second period was $1,232. Now there is a total of $1,848.
- Fund Manager Rick now has $900 in the PAMM.
- Investor Morty now has $150 in the PAMM.
- Investor Jerry now has $96 in the PAMM.
- Investor Summer now has $90 in the PAMM.
- Investor Beth now has $600 in the PAMM.
After Rick collects his service fee of 20%, his clients can determine whether they wish to rollover to the next trading period. If they continue to invest in Rick’s fund and they exit early, they would be subject to 5% early withdrawal fee and the fund holdings will re-balance accordingly after the daily rollover time is reached.
Every PAMM provider and fund manager has different rules of fund entry and withdrawals. Consider them before entering into a PAMM.
Managed Forex Account Type #2: MAM (Multi Account Manager) Accounts
Fund managers have multiple sub-accounts for the purposes of assigning a different level of leverage, which makes it suitable for investors with a higher risk tolerance and appetite. Fund managers are compensated with a percentage of the weekly/monthly/quarterly profits earned. Investors may withdraw profits or principal at the rollover period.
Managed Forex Account Type #3: Trading Signals (AKA Copy Trading)
Trading Signals are subscription services that copy trades from another trader whether it be an individual or a company. Instead of collecting a percentage of profits, these Signal Providers collect a flat subscription fee on a monthly basis. The user of the Trading Signal can choose to automate the process and have the trades be automatically triggered.
With Trading Signals, the positions being copied are all on a proportional basis based on the deposit load by the Signal Provider. In MetaTrader 4 and 5, subscribing to a Trading Signal is rather easy and it is a matter of having these things:
- An MQL5.com account.
- Having funds in your MQL5.com account to be able to purchase the subscription on a recurring basis.
- A live brokerage account that allows for trades to be placed through a MetaTrader 4 or 5 terminal.
Investors may only use ONE Trading Signal per MetaTrader account. Notice the language here because it is important. This is for a MetaTrader account only, not on a per MQL5.com account basis nor a brokerage account basis.
Let’s explain this differentiation because it is important to get the distinctions understood for this form of Managed Forex Trading.
A MetaTrader Account is the account number associated with a MetaTrader Terminal. It is not a brokerage account and merely having a MetaTrader Account does not entail one having an MQL5.com account. You can have multiple MetaTrader Account numbers connected to one brokerage account (sub-accounts) and not have an MQL5.com account.
A Brokerage Account is an account associated with a particular broker. Not every broker has a MetaTrader 4 or 5 license, if this is the case – there are other ways to place trades than through a MetaQuotes licensed terminal (the parent company of MetaTrader 4 and 5). The Brokerage Account is your nexus to the Forex and CFD markets. Naturally, a Brokerage Account would be required to use MetaTrader 4 or 5 and brokers with MT4 or MT5 licenses will automatically issue a MetaTrader Account to their clients. A Brokerage Account does not come with an MQL5.com account automatically, this is a completely different registration process that is absolutely not required for any Brokerage Account.
An MQL5.com Account is an absolute waste of time without a MetaTrader 4 or 5 Account. Can you have one without one? Sure. Can you have one without a Brokerage Account? Of course. However, there is extremely limited value here. Signing up for this account is a separate process and it is needed if you are looking to integrate Forex Signals into MetaTrader 4 or 5.
It’s important to keep in mind that if you are a MetaTrader 4 Account Holder, the Signal you sign up for must be a MetaTrader 4 Signal. If you are a MetaTrader 5 Account Holder, the Signal you sign up for must be a MetaTrader 5 Signal. There’s a distinction as there are two marketplaces on MQL5.com.
Can you have a MetaTrader 4 and MetaTrader 5 Account through the same broker? The answer is actually ‘yes’. However the following must be kept in mind:
- You need to use Sub-Accounts and this is as simple as requesting for your broker to create it.
- The broker needs to have both MetaTrader 4 and MetaTrader 5 licenses.
- The selection of signals on the MetaTrader 5 market is far less than the MetaTrader 4 market.
- The MetaTrader 5 Signal Marketplace has newer funds with less of a track record than the MetaTrader 4 Signal Marketplace.
Here’s where it gets even more interesting with Trading Signals within the scheme of Managed Forex Trading Accounts.
There are other sources for live signals outside of the MQL5.com marketplace. Now, the MQL5.com marketplace has a lot of signals and they are all independently verified, but this is not the only option. Brokers typically partner with signal providing marketplaces beyond what is available through MetaQuotes. Interestingly, Freevestor has two preferred brokers that provide a little bit of a different taste based on client needs.
- Orbex: Based out of Cyprus. Offers FXStat Tradebook.
- FP Markets: Based out of Australia. Offers MAMM and PAMM account options.
Of course, you can have accounts with both! Managed Forex Trading offers plenty of options, especially if you’re a Freevestor client. (Forgot to mention, Freevestor services are FREE)
How would a Trading Signal Subscription work?
In this scenario, we have Rick and Morty once again involved in a Managed Forex Trading relationship. Rick is the Signal Provider. Morty is the Signal Subscriber.
Rick is a trader and he has his trading account enabled to allow other traders to copy his trades proportionally. Rick has his trading account connected to a marketplace and all of the details concerning his trades are published for all to see. His trading history, drawdowns, withdrawals, leverage changes, deposit loads, monthly returns and almost any metric available concerning his trading history is available for the analysis of prospective subscribers. Rick can let potential subscribers understand what he is seeking to accomplish and the minimum amount that he recommends traders allot to his signal. Rick sets a monthly subscription fee to his Copy Trading Signal. In this case, Rick set it to $20 per month. Rick wants to use the proceeds to pay for tools to use in his garage.
Morty really does not know how to trade Forex and he could not be bothered to learn how to code or manually trade. He knows he can generate a better return on investment through leveraged investments than he would through the equity or fixed income markets. Morty wants to do it in a cost-effective fashion and so he jumps into the Forex Market. Morty takes a look at Rick’s trading history and metrics, he is impressed by what he sees and decides to take $10,000 and use it for a subscription into Rick’s signal. Morty pays the $20 to Rick and Morty is able to copy Rick’s trades. Rick turns an 8% profit in the month, which means that Morty has an $800 trading profit. Morty is free to withdraw the money he made any time, Rick really does not care what Morty does with the money in his account, Morty could use the $800 to buy a really cheap and sordid robot. Rick has no idea as to what Morty is doing, just as long as he remains a subscriber and is profiting from Rick’s trading efforts.
It’s a cold relationship that Rick and Morty enjoy, but it works as long as Rick remains profitable and consistent in his trading habits and success. Otherwise, Morty could spurn Rick and not renew his subscription. Morty can cancel his subscription any time and then choose to subscribe to another Signal Provider. He can choose Krombopulos Michael as his next Signal Provider and pay the $40 monthly fee that he charges.
With the same trading account (or sub-account), Morty cannot be subscribed to both Krombopulos Michael’s Trading Signal and Rick’s Trading Signal. If he wants to be subscribed to both, he’ll need to have the funds to be able to subscribe to both of them and set up a sub-account. With the account being divided into two sub-accounts, Morty can then subscribe to both and allocate the amount of funds he has to each one. The funds being allocated are the funds being used to copy the trades being made.
Where’s the Donut Hole of Managed Forex Trading Accounts?
The Donut Hole is the allocation and selection of the accounts and signals. These Managed Forex Trading options are all transparent in their methods, but picking the right one is an absolute mystery. How much should be allocated into each signal or account to be managed?
You did not just expect to use only one PAMM, MAM or Trading Signal? That’s a reckless act of faith.
You need a Managed Forex Portfolio.
There’s no service provider that does such a thing for clients. Most Introducing Brokers are glorified affiliates and only a few are actually money managers of any sort. Money managers handle your money physically, but Freevestor does not take money from you and creates the portfolio that works best for your needs. Everyone is different and has idiosyncratic goals.
Freevestor is the only advisor out there creating Managed Forex Trading portfolios and ensuring that clients are not left exposed to unsystematic risk (diversifiable risk). Freevestor is a portfolio provider and signal watchdog for its introduced clients and the services are FREE. Throw in the monthly cash distributions into client accounts and it is very likely that the cost of signal subscriptions on a monthly basis are completely defrayed.
Take a look at Freevestor’s Sample Portfolio, let’s discuss your goals in a consultation. Let’s create your perfect actively managed portfolio.