PAMM Trading

Percentage Allocation Management Module (PAMM) trading platforms have grown in popularity in recent years. Nowadays, PAMM trading is seen as one of the less risky ways to earn passive income online. In this guide to PAMM trading, we explain how different systems works plus the pros and cons for both investors and fund managers.

PAMM Brokers

LQDFX offers online trading with multiple STP accounts and MT4 analysis tools.

How PAMM Trading Works

PAMM stands for Percentage Allocation Management Module or Percentage Allocation Money Management. PAMM trading is a form of pooled capital where investors—also called followers—allocate their money to a qualified trader or money manager in desired proportions. These traders can manage several trading accounts at one time using their own capital and the pooled money to generate profits.

Managers distribute the portion of trades according to the percentage allocation. This percentage is defined by the trader in the manager offer—an agreement regulating the relationship between an investor and the PAMM trader managing funds.

Money managers are usually rewarded by charging management fees—taken from investor balances every month—and incentive fees which depend on the profits obtained by the fund manager.

PAMM trading

PAMM trading is an attractive option for inexperienced investors who want to benefit from forex or stock trading, for example, but do not have sufficient time or knowledge to commit to the process.

PAMM Trading Example

Let’s say a trader deposits $2,000 and investors contribute their own money to the trader’s PAMM account too. Investor A adds $5,000 and Investor B adds $3,000. The total of the pooled pot is $10,000. The manager keeps trading through the PAMM account using the pooled funds of $10,000.

If the trader makes a 100% return ($10,000), they would take away their $2,000 investment plus $2,000 profit. Investor A would be able to withdraw their $5,000 investment plus $5,000 in profit and Investor B would take their $3,000 plus $3,000 in profit.

However, say the fund manager’s incentive remuneration was set at 25% of the total return, the trader would also benefit from Investors A and B’s profit. The trader would earn $2,500 from Investor A and $1,500 from Investor B, adding a total of $4,000 to the trader’s overall profit.

Setting Up

The trader or money manager opens a PAMM account and meets the minimum deposit requirement, as specified by the broker. The trader must define the terms in the PAMM manager offer such as the minimum investment deposit, time period, and the premium as a percentage of the profit gained.

An investor can analyse a trader’s results through a system that monitors PAMM accounts held with a brokerage. A user can then decide whether to invest with that specific trader or not. New clients can get up and running in a few minutes at top PAMM trading platforms.

PAMM Vs MAM Vs LAMM

MAM (Multi-Account Manager) solutions are a derivative of the PAMM system. MAM accounts allow traders to use the percentage allocation method but provide more flexibility to allocate the trades and adjust the risk of each sub-account based on the clients’ risk profiles. MAM accounts combine individual trader capital into a large pool of managed funds. However, if you are connected to the master account in the PAMM system, you will achieve the same results in your investor account which is not guaranteed when MAM trading.

Many brokers offer both PAMM and MAMM trading but MAM master accounts are not typically visible on leaderboards unlike with PAMM services.

PAMM trading systems

LAMM (Lot Allocation Management Module) is considered to be the predecessor of PAMM. It does not function according to the size of each investor account. The investor chooses the number of lots that can be traded in the market and the profits (or losses) are determined based on the multiples of lots invested. LAMM trading is best suited to those with more capital.

Benefits Of PAMM Trading

There are several advantages of PAMM trading for both investors and traders:

  • No experience needed – the trader is the one making the decisions but you still reap the rewards of their hard work. Investors can replicate one or more successful trading strategies in their PAMM terminal.
  • Access to more capital – PAMM managers gain access to more capital than they would if they were just trading with their own funds. Unsurprisingly, pooled funds often generate more profits than smaller investments, especially in forex trading due to smaller profit margins.
  • Hands-off approach – PAMM trading is a good option for investors who don’t have the time to commit to the financial markets.
  • Easy to invest – investors can deposit funds into their account once and then allocate those funds across several PAMM trading solutions.
  • Joint risk – PAMM traders are risking their own capital as well as their investors’ money. More experienced investors avoid managers that only have a small amount of their own capital on the line.
  • PAMM brokers act as guarantors – the obligations made between money managers and investors are guaranteed by the broker and the master trader cannot disappear with investors’ money. Although capital is managed by the trader, they cannot withdraw it.
  • Account history – PAMM brokers usually provide a breakdown of a master trader’s track record to help clients find a reliable trader.
  • Rewards – profitable traders can receive profits from the management of both their own capital and investors’ funds.

Drawbacks Of PAMM Trading

As with most types of investing, there are some drawbacks to PAMM trading:

  • Loss possibility – if a broker doesn’t allow an investor to set a maximum loss limit, the client’s loss can hit 100%, meaning a total drawdown.
  • Less learning – unlike with copy trading, investors cannot study a PAMM trader’s investing style, making it harder to develop your own skills.
  • Less visible – investors may not know who is managing their capital. It could be either a seasoned trader or a beginner using profitable but seriously risky strategies. It could also be a sophisticated bot developed to partially or fully wipe out investors’ funds after several profitable time periods.

How To Start PAMM Trading

Choosing A Broker

  • Regulation – look for PAMM trading platforms that are properly regulated and licensed. We do not recommend trading with unregulated providers.
  • Fees – make sure your broker is transparent about performance and fees, including having the full flexibility to deposit and withdraw your funds as needed. Also, customer deposits should be held in your own trading account so that you’re the only person able to make payments.
  • Statistics – having access to information and important statistics is vital. You want to choose a PAMM trading provider that offers a service that suits your risk appetite, profile, and financial aspirations. Key information includes the type of PAMM trading system, when it was created, the currency, how many followers/investors the trader has, average win/loss ratio, drawdown, and more.

Choosing A Manager

  • Experience – looking at the PAMM trader’s track record will help ensure you find an experienced and established investor. By looking at their history, you can conduct a deeper analysis of their financial results. Ideally, PAMM trading services with 3 or 4 years’ experience are best.
  • Maximum drawdown – being able to set a maximum drawdown will decrease your risk exposure. For beginners, we recommend choosing accounts with the maximum drawdown level equal to no more than 40%.
  • Profitability – select a PAMM trading provider that balances profitability with your investment style. Profitability is closely linked to your maximum drawdown limit. Accounts where the ratio of maximum drawdown to profitability is no higher than 1:3 tend to perform better.
  • Consistency – how consistent is a fund manager’s results? Consistent returns are arguably better than unpredictable peaks and troughs with regular success making it easier to plan.
  • Fund manager equity – investors can view PAMM managers’ equity via the broker. Sophisticated investors tend to avoid using PAMM traders who only have a small amount of their own funds on the line. The higher the equity, the greater their personal risk and arguably the more motivation to get it right.
  • Popularity – a trader that already manages funds for several investors is a good sign. The best providers are transparent about their current portfolio of clients.

Final Word On PAMM Trading

PAMM trading technology allows investors with a limited understanding of market trends to profit from others’ expert knowledge. But while there are multiple benefits of PAMM trading, beginners may struggle to build their own skills. As a result, it’s important to weigh up your options, including how much time you have, your objectives and your risk appetite. See our list of the best PAMM trading brokers to get started today.

FAQs

What Is PAMM Trading?

With PAMM trading, your money is handled by a fund manager who places trades on your behalf with the aim of making a profit. Multiple investors pool their funds to maximise returns and profits are distributed equally according to the amount each investor put forward.

Should I Start PAMM Trading?

PAMM trading is growing in popularity. For beginners, in particular, it offers a means of generating income from the financial markets without a serious time commitment. With that said, profits are not guaranteed and you can lose money, especially if you don’t choose a master trader carefully.

Is PAMM Trading Safe?

PAMM trading is offered by many regulated brokers that offer a secure investing environment. However, PAMM trading is not always profitable, and to some extent, you are at the mercy of the fund manager.

Which Brokers Offer PAMM Trading?

Several brokers offer PAMM trading, including Alpari, FXOpen, FXPrimus, and ThinkMarkets. See our list of the best PAMM trading brokers, including reviews, to get started.

What Is The Difference Between PAMM, MAM, And LAMM Trading?

PAMM, MAM, and LAMM are all money management systems. MAM accounts allow managers to assign higher leverage to sub-accounts and are attractive to investors with a high-risk appetite. LAMM is an early iteration of PAMM where a trader is allowed to allocate different lots to individual investor accounts.

Further Reading