Following the financial crisis of 2007-2008, the US government felt the need to tighten regulation around various financial instruments. Although they didn’t admit it, the financial crisis was fuelled by the regulators’ inability to monitor all activities carried out by bankers and other financial institutions. It was a valuable lesson, though, and it spurred various changes in the financial markets.
In 2010, the Dodd-Frank Act was signed and put into practice, which affected many financial instruments. PAMM accounts became less commonly offered by US-based Forex brokers due to heavy regulation, while other financial instruments like binary options were strongly discouraged by the regulators. (What is a PAMM account in Forex?)
Still, we know that PAMM accounts can be a great opportunity, so how can US residents still make use of them? Here are the 5 tips to help you:
Find a good source for PAMM accounts
Although many Forex brokers based in the US completely abandoned the PAMM account offering, there are still some who do. If you have been trading with a US-based broker, you should confirm with their customer support team whether this service is still available. Even when you do find the service by a US broker, chances are there will be lots of restrictions, which may put you off. (Best US-regulated Forex brokers)
The next best thing is to use a European or Australian broker. These areas have good enough regulations to protect your investment while offering flexible PAMM account options. Some of these brokers outside the US may again decline to accept US residents as clients, but there are so many brokers you won’t miss offering the service. Compare Forex brokers and find the one who has the best services.
Once you have found all the PAMM account options available to you, the choice may be difficult to make. There will be many good brokers and all of them have several PAMM accounts available, so you need to know how to weed out the good ones from the bad. (How to select a PAMM account)
Check for the broker’s authenticity
PAMM accounts are usually offered by Forex brokers, and it is up to them to ensure the investors’ funds are secure. As such, it is important to be sure that the broker is authentic and regulated by one of the trustworthy Forex regulators. Better yet, just check out this best Forex PAMM brokers list for quicker identification of trustworthy brokers.
Since PAMM accounts are not always offered by Forex brokers in the US, it might be difficult to find any broker offering the service that is regulated by the National Futures Association (NFA). The second most trusted regulator is the Financial Conduct Authority (FCA) in the UK, and you can find some excellent brokers in the FCA-regulated Forex brokers list. Other trusted regulators include the CySEC (Cyprus), ASIC (Australia), and even FINMA (Switzerland).
Analyze the account manager’s past performance
This is the most important aspect of a good PAMM account because it determines how much benefit you are going to gain from it. Here, there’s more to look at besides the amount of profit, because as we all know, some traders make money for a short while just out of luck before blowing it all away.
You don’t want to fall into such a situation, so it is important to ensure the account manager can sustain consistent profits. What you need to check for is:
Length of time the PAMM account has been active
Only the best PAMM accounts can survive the test of time. Just think about it, how long would you leave your money in a PAMM account if it wasn’t profitable? Therefore, when you see an account that has been active for years, then that is usually the first sign that the account manager knows what they are doing.
Profitability of the account
The greatest traders are the ones who can sustain consistent profits for months, preferably years, to prove that their success is truly caused by their skill rather than luck. Every PAMM account should indicate how long it has been active, the amount of profit made over the time the account has been active as well as the most recent performance.
Here’s the key metric, overall performance is better than the most recent performance. Even the best traders will suffer losses at some point in their careers, and this may impact their short-term profits, but they always come out ahead. So, when choosing a PAMM account look for the one with the best performance over the longer term, even if recent performance seems to be bad.
This also comes back to patience – a PAMM account is like an investment, and you should not expect abnormal profits within days. To gain the most from a PAMM account, you should be ready to invest for a long time, months, and even years. In the end, you will find that the returns from such an account are far better than those from a savings account at a bank.
Check for drawdown
Drawdown determines how many consecutive losses can be sustained. When expressed as a percentage, the maximum drawdown tells the investors of the PAMM account how much of the account’s capital can be lost in consecutive losses. The ideal maximum drawdown for you would depend on your particular needs.
For example, if you’re looking for a short-term investment, then a high drawdown could put you in a difficult position. On the other hand, a long-term investor would not mind a slightly high drawdown as long as the overall profits were enough to cover the losses. Therefore, you should also determine how long you would like your money to sit in the PAMM account before you request a withdrawal.
Regardless of how long you intend to keep your investment in the PAMM account, it is always advisable to keep the drawdown to a minimum. Drawdowns will always be there because, as I mentioned before, every trader will have some losses, but it is important to keep them down. A maximum drawdown of 20% or lower is recommended, and you should avoid PAMM accounts with drawdowns exceeding 50%.
Match your risk appetite
Every PAMM account manager should declare how they intend to manage the capital in the account. High-risk account managers will take bigger risks either in the form of bigger lots or trading in periods of high volatility while risk-averse managers will do the opposite. Again, the choice between the two will depend on your strategy, and you should be aware of the consequences. (Risk-management on Forex)
High-risk account managers are bound to gain bigger profits faster, especially if they trade during periods of high volatility, but there is also the increased risk of bigger losses. When you choose such a PAMM account, you can expect huge returns, but don’t be surprised either when a significant portion of your profits are wiped out. On the other hand, a risk-averse manager may not deliver quick profits, but there is also a reduced risk of losses.
Look for alternatives
If you can’t find a PAMM account that suits your needs, then it’s okay to find alternatives. Some of the systems that can replace the PAMM system include:
Multi-account manager (MAM) accounts are a more sophisticated form of account, where the investors get to enjoy higher leverage but initiate the trades themselves. These types of accounts were not barred by the Dodd-Frank Act of 2010, so they are still available to US residents.
PAMM accounts were barred because there was potential for client funds abuse by the account managers, but since the investors are still in control of their funds in MAM accounts, they are still available.
The other advantage of such accounts is that it allows a US trader to exceed the 50:1 leverage limit set by the CFTC. Following the aforementioned Act, leverage was capped at 50:1 by the CFTC, but MAM accounts allow for higher leverage, which means you can then trade bigger lots than were previously available. The downside is, of course, the increased risk because leverage works both for and against you. The other option is the LAMM account which acts somewhat like a trading signal, except that it is more robust.
The other option is to make use of trading signals which initiate trades on your account. These act a lot like LAMM (Lot Allocation Money Management) signals, except they are not monitored by the Forex broker. This presents a risk now that there is no one to oversee the signal provider, but it also means that there are lots more sources of such signals. It is also possible to get really good trading signals from some trusted signal providers, but you need to be careful about your sources. (How to find reliable trading signals)