The world of investing offers various passive income tools for those who are not experts. One such example is managed forex accounts. These are currency trading accounts where the client/investor deposits money and gives it to traders/managers for management. The task of professional traders is to perform transactions, and operations based on their knowledge and experience on behalf of the client.
The investor thus increases his capital, and the trader receives remuneration at the expense of the commission. Whether the market is up or down, the trader always has the opportunity to earn.
Managed forex accounts are one of the alternatives, besides stocks and bonds, to get high income, but it is always worth remembering the risk of losses.
The turnover of the world currency market is estimated at over $6 trillion per day, and it offers the possibility of operations with 170 currencies.
What Are Managed Forex Accounts?
Managed Forex accounts are chosen by those who want to have in their portfolio income from foreign currency trading without being a specialist in this field. Individual investors make a minimum deposit to the account, choose a trader they trust to manage their money, and determine the degree of risk (leverage) for trading.
At the initial stage, choosing a reliable broker and a regulated jurisdiction is important, as this will guarantee the safety of funds.
Regulation means that a supervisory body monitors the ethics of brokers, their compliance with all legal requirements, transparency of their activities, storage of client data, and compliance with forex account management standards. If these conditions are not met, the broker is deprived of its license and the possibility to work legally on the forex market.
Regulatory jurisdictions can be divided into three levels:
- Tight control (Category A and B). These are jurisdictions with a high reputation in the market, whose forex trading license is a confirmation of high standards of work and protection of clients’ assets, such as the UK, USA, and Switzerland.
- Medium Control (Category C). Characterized by certain requirements for the experience of traders, but less protection of clients’ interests, as in Dubai, and Cyprus.
- Weak control (category D). These are offshore zones with favorable conditions for companies, minimal initial capital, but a low degree of capital protection, as in the Bahamas, Mauritius, Seychelles, and forex license in Vanuatu.
There are also zones with a complete absence of regulation. In this case, no one will guarantee the return of users’ money.
How do managed Forex accounts work?
The investor delegates forex account management to the selected trader and determines the type of account, the degree of trading restrictions, risks, as well as the percentage of profit earned. The investor remains the owner of the account and capital, while the broker manages the money based on agreements.
Depending on the trading strategy, the accounts of several investors can be combined to diversify costs, the financial manager then trades on behalf of all participants or the investor allows trading in one account, while determining the terms of work.
The client replenishes accounts by card, bank transfers, or use digital wallets. Early withdrawal of money from the deposit may be accompanied by payment of additional commissions.
Tracking the efficiency of the trader’s work is presented in the following form:
- a report for the month with a detailed description of bets, profits and losses,
- real-time tracking, where information about the conducted transactions and their result is immediately displayed
- direct communication with the broker, when the strategy of work is developed directly with the manager.
Professional managers always have profiles, where the results of their activity, the profitability of conducted transactions, the amount of assets under management, and the risk level of operations are displayed. It is important to take into account the commissions charged by the trader. You can check the availability of a license with the help of online registers.
What types of managed accounts are offered by brokers?
Managed forex accounts are divided into types, each has its features of work, the degree of acceptable risk for the investor, the way of distribution of income, and losses.
The following types of accounts are distinguished:
- MAM (Multi-Account Manager).
- PAMM (Percentage Allocation Management Module).
- LAMM (Lot Allocation Management Module).
- RAMM (Risk Allocation Management Model).
- Forex copy trading.
- Advisory services.
- Managed portfolios.
MAM – consists of a main account with several separate accounts. Each account has its own risk and withdrawal attributes. Profits and losses are allocated according to the trading results of each account.
PAMM – the investor determines the percentage of his capital that can be managed by the trader. The trader pools funds from other investors on one PAMM and conducts trading. The total amount of profit is distributed according to the percentage of participation in the trade.
In LAMM – trading is based on lots, the trader selects a lot to trade, and income/losses are broken down proportionally to the amount of the lot involved.
RAMM – The investor selects the degree of risk, and leverage for trading operations, then automatically allocates trades according to the level of risk acceptance. Suitable for investors who want to manage their risks.
Forex copy trading – copying trades of one trader by another trader. Usually, trades of large and successful traders are copied/repeated with their consent. This can be done manually or automatically. The second trader gets the result of the first trader, the difference is the sum of trades.
Advisory services – the expert consults the investor on financial portfolio management, as well as the use of successful practices in trading.
Managed portfolios – the trader has more authority, and investments also take place outside of Forex. The trader is paid depending on the volume of the managed portfolio.
The choice of account type depends on the trading strategy, the degree of risk acceptance, and the desire to trade independently or to entrust a forex account manager.
Are managed accounts risky?
The Forex market is volatile and the risks of capital losses are quite high. Even professional managers with a proven reputation can work at a disadvantage. The control over the account remains with the investor and it is he who determines the percentage/amount he is ready to risk.
Never transfer money to a trader’s personal bank account, it is strictly forbidden for financial managers to work legally.
A more detailed approach to managed forex accounts, account types, and stop losses will only serve positively for the investor.
Pros of managed forex accounts:
- Passive income. The investor does not trade, only chooses the risk zone. The trader is interested in getting more profit, as his remuneration depends on the amount of income.
- Professional approach. Investors pay for the knowledge and experience of the trader, it is important to choose a regulated jurisdiction and a trader with a good reputation.
- Investor control. The investor determines what type of account to open, and what percentage of capital he is ready to risk, and the trader carries out operations according to the recommendations.
Minuses of managed forex accounts:
- Profit and loss. The amount of profit or loss depends on the skills of the manager, not the investor.
- Choice of trades. A trader, based on his experience, takes risks when choosing one or another deal.
- It is difficult to choose the right strategy. Even forex copy trading is not a guarantee of profit.
Managed forex accounts are a good option for beginners in trading, who have no experience and have the opportunity to monitor market dynamics and the choice of strategies of famous traders. For investors, it is the importance of portfolio diversification, passive earnings, and improving financial skills. It is worth avoiding unregulated markets and traders offering guaranteed high returns, it can lead to the loss of all capital.