HFM information and reviews
HFM
96%
FXCC information and reviews
FXCC
92%
FxPro information and reviews
FxPro
89%
FBS information and reviews
FBS
88%
XM information and reviews
XM
86%
Exness information and reviews
Exness
86%

How to Assess PAMM Account


How to assess and minimize the risks of PAMM Account


Profitability volatility is one of the main criteria for assessing the risk of a PAMM account

PAMM Account Monitoring Service provides an extensive overview of tools for analyzing the work of managers. In general, all monitoring indicators are divided into two groups: some reflect the effectiveness of the trading system, its ability to generate profit, and others reflect how well money is managed on the PAMM account. One of the main criteria, demonstrating how consistently the rules of money management are followed on the account, is an indicator of volatility.

Sometimes both investors and traders confuse the concepts of PAMM-account profitability volatility and currency pair volatility. These concepts should be separated. The volatility of a currency pair shows how many points the exchange rate of a particular currency in relation to another changes per unit of time, for example, in a day. This indicator can be different and varies for major currencies, as a rule, in the range of 50-200 points per day. The volatility of the PAMM account is the fluctuation in the daily profitability of the PAMM account, measured in percent. Mathematically, account volatility is the ratio of daily profit or loss to the size of funds in an account.

For a certain period, volatility can be average and maximum. Average volatility characterizes the aggressiveness of trading on the account for a certain period of time. It shows what share of the PAMM-account funds the manager is ready to take risks with. In general, if the volatility indicator does not exceed 5%, it is safe to say that the loss limit is used on the account, and a quick drain is unlikely to happen – unless there is a technical error on the side of the manager or some force majeure the market. The disadvantage of this indicator is that the volatility of daily returns is the arithmetic average of all daily returns. That is, this indicator does not show how strong fluctuations in profitability on individual days are. It may well be that the average account volatility is 10%, and the maximum daily loss is 90%, that is, a little more, and the account could be emptied. Therefore, when assessing risks, the maximum daily volatility should also be taken into account.

Maximum daily volatility is the maximum loss or profit taken modulo. This indicator demonstrates how much the trader can sometimes “get stuck”, and how much he is ready to “draw down” his account.

Returning to the confusion of the concepts of the volatility of the profitability of a PAMM account and the volatility of a currency pair, it makes sense to note the following. It is often heard that when a volatility of a currency pair changes, a change in the volatility of a PAMM account is normal. It’s hard to agree with that. Indeed, an increase in account volatility leads to increased risks. And this, in turn, is a diversion from the rules of money management. Therefore, when the volatility of the currency pair being traded increases, nothing prevents the PAMM-account manager from decreasing the lot size; so that the volatility of the account remains at a given level. This statement makes sense in situations where increase in the volatility of a currency pair leads to pushing apart of Stop Loss and Take Profit values.

In general, we can say that for investing with the same profitability it makes sense to choose the PAMM account, the volatility of which is less, because in this case the risks of losing your money as an investor are much lower. When choosing a PAMM account, a pretty good indicator is the ratio of account profitability (expressed in share price) to the maximum daily loss (or profit, whichever is greater by modulus). Ideally, the logarithmic ratio of these quantities should be considered.

As you know, you can earn much more on Forex than when opening a bank account. But the risk of losing your savings here is much higher. This applies not only to traders, but to investors in PAMM accounts. A logical question arises: is it possible for an investor to significantly reduce risk while maintaining profitability at an acceptable level. The answer will be yes: yes, you can. To do this, the investor must correctly compile an investment portfolio of several PAMM accounts.

Why do you need a PAMM portfolio?


One PAMM account, no matter how profitable and reliable it is, in any case carries significant risks. Therefore, to minimize risks, a PAMM portfolio is created consisting of several PAMM accounts.

How to create a PAMM portfolio


You can, of course, open the rating of PAMM portfolios and take advantage of a ready-made investment offer, without really going into the study of the criteria for selecting PAMM accounts for investment. In this case, however, two things must be taken into account:

In addition to paying remuneration to the managers of PAMM accounts, you will also need to pay a fee to the manager of the PAMM portfolio.
You cannot be completely confident how well the manager has formed his investment portfolio.

Or you can spend a little time and learn how to choose PAMM accounts for investment yourself. Select multiple accounts according to criteria such as potential profitability, drawdowns, risks, age of accounts. At the very least, you will be sure that the accounts in your portfolio fell according to the specified criteria, and not because someone just wanted to include them in their portfolio. Well, save on commissions for managing the PAMM portfolio, of course.

Suppose you have selected several potentially attractive PAMM accounts for investing. Now it remains to understand how many of them should be in the portfolio, and in what proportions the shares are distributed. It is believed that there should be 5-10 accounts in the PAMM portfolio. If less than 5, then diversification will be insufficient. If more than 10, then with so many accounts it will be quite difficult to keep track of. In addition, according to popular opinion, the share of conservative accounts, with a high degree of reliability and, accordingly, with not the highest potential profitability, in the portfolio should be 70-80%. Accordingly, the share of aggressive ones is 20-30%. With this ratio, the profit received from investments in aggressive accounts may be even greater than from investments in conservative ones, despite their higher share in the portfolio. And if any of the aggressive accounts makes a loss, this will not critically affect your financial well-being due to the low share of funds invested in this account in the PAMM portfolio. Moreover, in any case, you have good chances to get the total profit from the PAMM portfolio, since conservative accounts, albeit little by little, should be profitable.

In conclusion, we should dwell on this aspect. When selecting PAMM accounts, it often turns out that several of the most successful accounts are managed by the same manager. So, it makes sense to invest in only one of them, since usually on all these accounts trading is carried out approximately according to the same system. The difference between one PAMM account and another is only in the level of risks and, accordingly, profitability. In the event of any malfunction in the system, you will receive a loss on several accounts at once, if you invest in more than one PAMM account of one manager.

Author: Kate Solano, Forex-Ratings.com

RELATED

Ethereum trading in 2020: step-by-step guide

The Ethereum cryptocurrency is an open software platform based on blockchain technology that allows developers to create and release decentralized applications...

How Panic Works In Stock Markets And How To Deal With It

We can recall dozens of examples of panics in the markets when in a few trading days with a loud chuckle whole states went into the mire of market volatility...

Why trade cryptocurrency CFDS?

What would you do today if you learned cryptocurrency trading five years ago? Cryptocurrency is a new venue for many people looking for an alternative platform to invest in

Trading based on fundamental analysis

Fundamental analysis has been used for decades by investors wanting to identify the factors that can have an impact on asset values. Such...

Ultimate guide to Chainlink trading

Chainlink aims to bring interoperability to blockchain by facilitating the seamless flow of real-world data to cryptocurrency networks. As the cryptocurrency market...

Unlocking the World of Commodities: An In-Depth Exploration

Commodity markets have often been portrayed as a realm for high-risk individuals, and while there's some historical accuracy in that depiction, the reality is that nearly every type of investor engages in commodity markets...

Volume Indicators. On-balance-volume

Volume indicators provide a very different kind of indicator because, instead of relying solely on the price, they take volume into account. Prices tell you in which direction an investment is moving...

Bitcoin Cash: Will It Reach Great Heights Again?

All financial markets have ups and downs, and Bitcoin Cash fits this rule just like any other cryptocurrency. But due to the novelty, these cycles of increase or decrease...

Pair Trading: Effective Strategies

Pair trading is used by experienced traders as a reliable tool for risk diversification. For the successful implementation of a long-term trading...

How to make money on meme stock?

Meme stocks are shares that gained popularity and achieved a cult-like following on social media. As a result, private investors in online communities can create hype and influence the price of individual shares...

How can you make money on the stock market with Olymp Trade?

Profiting on the success of Tesla or Google - isn’t that tempting? The stock market gives you a chance at that, as well as a number of other opportunities to profit...

What are binary options in the global financial market

In the global financial market, as in many other areas of commercial activity, there are often categories that seem to the uninitiated person very difficult to understand and use...

Cardano vs. Solana: Which one is the Better Investment?

Cardano and Solana have captured the imagination of crypto enthusiasts in the last few years, rising with the previous bullish run of crypto. The two cryptocurrencies...

A Comprehensive Guide to Trading in Volatile Markets

Trading in volatile markets can be a challenging yet rewarding endeavor. To navigate these turbulent waters successfully, it's crucial to understand the dynamics at play, and one of the key tools for doing so is the VIX...

Steps on how to trade Cryptocurrency in 2020

Every country has its own paper or fiat currency which is usually printed and controlled by the national or central bank. This is why forex transactions are important...

Forget About Sweating Over Trading Charts And Earn Passive Income With Cryptocurrencies

No one is going to argue the fact that cryptocurrencies are among the most profit-bearing assets on the contemporary financial market while also being designed to be easily...

How to Trade with ChatGPT: Unveiling Tips and Tricks of AI Trading

In recent years, artificial intelligence (AI) has emerged as a powerful tool for traders and investors, offering insights, analyses, and predictions to enhance decision-making...

What Are The Bulls Power And Bears Power Indicators?

To make forex trading as productive as possible and to make trades more accurate, it is recommended to use technical tools, such as indicators. The choice of indicators directly depends...

Ten Tips to becoming a Forex Trader

Getting started in forex has never been simpler. Easier access to currency markets and brokerage platforms that fit a range of trading needs has become widely prevalent...

Is the US market too expensive during COVID-19?

Global financial media have reported the "extreme cost" of the US stock market in recent days. In theory, this should be followed by an imminent collapse...

FP Markets information and reviews
FP Markets
81%
IronFX information and reviews
IronFX
77%
T4Trade information and reviews
T4Trade
76%
Just2Trade information and reviews
Just2Trade
76%
FXNovus information and reviews
FXNovus
75%
Riverquode information and reviews
Riverquode
75%

© 2006-2025 Forex-Ratings.com

The usage of this website constitutes acceptance of the following legal information.
Any contracts of financial instruments offered to conclude bear high risks and may result in the full loss of the deposited funds. Prior to making transactions one should get acquainted with the risks to which they relate. All the information featured on the website (reviews, brokers' news, comments, analysis, quotes, forecasts or other information materials provided by Forex Ratings, as well as information provided by the partners), including graphical information about the forex companies, brokers and dealing desks, is intended solely for informational purposes, is not a means of advertising them, and doesn't imply direct instructions for investing. Forex Ratings shall not be liable for any loss, including unlimited loss of funds, which may arise directly or indirectly from the usage of this information. The editorial staff of the website does not bear any responsibility whatsoever for the content of the comments or reviews made by the site users about the forex companies. The entire responsibility for the contents rests with the commentators. Reprint of the materials is available only with the permission of the editorial staff.
We use cookies to improve your experience and to make your stay with us more comfortable. By using Forex-Ratings.com website you agree to the cookies policy.