It is not easy to select a good PAMM Manager even for the experienced investor. While searching for a perfect Manager you should pay attention to the following criteria:
- Quality of trading system
- Transparency of trading operations and manager’s motivation.
- Profit and risk level
The experience of a trader in the financial market and in Forex gives him/her knowledge of the specifics of price movement and an understanding of the situation in a period of high volatility. An experienced trader does not lose control even in the event of force majeure. Books and manuals will never replace the ability of a manager to react adequately to the unexpected highs and lows and terminate tradesat the right moment. It is good if a PAMM Manager has 5-7 years of work experience. Note that currency market differs very much from the stock and derivatives market. Therefore, try to choose a manager who has been working the Forex market. Many brokers offer services of PAMM managers who have work experience of less than a year. In this situation investors will bear additional risks.
Quality of a Trading system
A Trading system incorporate indicators which show signals for entering or leaving the market, as well as money and risk management systems. Good PAMM Managers shall be able to develop and test their own trading system, instead of using trading advisors. As a rule Managers do not reveal all their trading secrets; however, if we know the information about whether a Manager uses limit orders and stop-losses; how many indicators he uses, and, what are the conditions for taking profit, will allow us to make better conclusions, about making our investments. We should avoid working with the Managers who do not use stop-losses (a) or use more than 4 indicators (b); as in case (a), investors bear unjustified risks and in case (b) the system is too overloaded to show correct profitability level. It is possible to bear the risk of less than 15%, with an optimal risk level at 10%. If in each trade a trader bears 20% of risk, after 5 unsuccessful trades in a row investor’s account will be zero.
If an investor does not have enough experience to make a detailed analysis of the trading system, he/she can judge the quality of a trading system by the testing parameters. The longer a testing period, the more precise is the data and we can expect that in future the real level of profit and risk will be approximately the same as during the test.
Parameters of profit and risks
Efficiency of a PAMM Manager may be evaluated by the level of profit. Beginners believe that the higher the level of profit the better. However, they forget that the level of profit shall be based the following parameters:
- Maximum drawdown
- Average drawdown
- Average duration of a drawdown
- Profit for a certain period of time
Duration of drawdown clearly shows how longer investments can be unprofitable, and the longer the period, the lower the profit. We can see that on some accounts for 90% of the time; is the period of loss, while only the latter period is the period of profit. One of the most important rules is to evaluate the ratio of profit and risks taking account of all commissions.
Transparency of trading operations and motivation of a Manager
Confidence in the PAMM Manager is based on the transparency of the information. A skillful manager usually provides a lot of information to an investor, thus, attracting more investors. In addition, it is important to evaluate Manager’s investments into the account. If a manager is confident in their trading system they will not hesitate to invest their own capital into the account. Investments of 500-1000 USD will demonstrate confidence of a Manager in their own account.
The list of the above criteria can be continued. We can evaluate parameters of the profit division, analyze comments of the other investors and review ratings by a broker.
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The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteForex. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.