Forex Trading - What is a PAMM trading account?

What is PAMM?

PAMM stands for Percentage Allocation Money Management (PAMM). This is a system of forex investment where investors pool money together and allocate it to an account manager to trade, with the account manager also having a vested interest in the arrangement. So unlike other systems of forex account management where the managers have no vested interest, a PAMM account manager is also a contributor to the pool of investment funds that will be traded by him/her. Any profits that are generated from the trading activity are shared between all investors, and the passive investors pay an agreed sum to the account manager in addition to the manager’s profit shared percentage, as fees for the trading work on the account.

PAMM: How it Works

Forex is an investment vehicle where the value of profits made is directly proportional to the volume of capital invested. 10% profit on a $1,000 account will only yield $100. But 10% on a $100,000 investment is $10,000. So even though 10% has been gained in both situations, the larger amount ultimately makes more money. So PAMM has been created to enable forex traders gain more from joining forces together, and also provides a vehicle where those who do not have the time or the skill to trade forex profitably can earn from the forex market.

Having the account manager vested financially in the arrangement also places a burden of responsibility on the manager to ensure that things are done professionally.

Usually the account manager is the initiator of the PAMM arrangement. To make the account attractive for investors, an intending manager must first setup a PAMM account and generate profitable trading history over several months. This is what is known as the Manager’s Fund or Capital. This capital cannot be drawn on once the PAMM arrangement is active. After this has been generated, it is time to get your investors and begin your account operations.

Step 1

Let us assume that the starting Manager’s Fund that has been traded with profits generated over time is up to $5,000. The Manager will make a proposal to investors using the PAMM platform of a chosen broker. This proposal contains the minimum investment required per investor, how many investors are being sought, and what percentage will be paid by investors to the Manager on completion of a profitable round of investments. The time frame for a round is also stated; this is usually a month.

Step 2

Let us assume that two investors have joined the arrangement. Investor 1 brings in $3000 and Investor 2 brings in $2,000. Adding the Manager’s Capital of $5,000, the PAMM fund is now worth $10,000.

Step 3

The Manager trades a quarterly cycle and makes $10,000 in profit, raising the amount in the PAMM account to $20,000. Profits are shared according to the ratio of capital from the Manager and the two investors, which is 50:30:20. All ratios must add up to 100%. So the profit of each investor is shared as follows:

- Manager: $5,000
- Investor 1: $3,000
- Investor 2: $2,000

But it does not end there. Assuming the Manager is to be paid 15% fees for the trading service, each investor will be required to pay 15% of their own profits to the Manager.

- Investor 1 will pay 15% of $3,000 = $450
- Investor 2 will pay 15% of $2,000 = $300

So the Manager gets an additional $750 on his profit share, while Investors 1 and 2 are left with $2,550 and $1,700 of their profits respectively.

What Happens if Losses Are Sustained?

Usually, all parties will partake of the losses. But since no profit is made, no withdrawals can be made. The losses must be recovered either by adding new capital (either the Manager or all parties can agree to do this), or by trading the leftover capital to recover the losses. Any profits made from the new round of trading must first settle all losses to grow the account back to its original state, before leftover profits can be shared in the same agreed percentages as before.

A PAMM account is free to take in new investors after each round of trading, and allocation of profits/losses can be made according to the ratio of capital brought in by each party.