PAMM Forex Accounts. Is it a Scam?

What is a PAMM Account?

Well, PAMM accounts (Percent Allocation Manage Module) are those where an experienced trader trades using his money and some money invested by any investor willing to participate.

These traders or managers are supposedly experienced traders in the markets, normally in forex, and they will charge a percentage of the winnings they make in those accounts. If the manager does not win, he does not make money.

To become you need to fill some requirements and sometimes some previous performance is needed.

Conditions are about: minimum trades per month, maximum draw dawn, and good money management.

This type of investing is meant to be good for the novice trader since he can invest with the most experienced trader and make, in theory, good money.

As disadvantages, we may say that sometimes the customer is not able to withdraw the money whenever he wants

Is it worth to invest with PAMM accounts?

In these terms, it seems that it is a good thing, and everyone with internet access can participate in the world of easy and big profits and returns of the investment world.

Well, things are not so easy.

If people took their time to know what the typical return for the best world managers is then, they would understand that 100% return per year is not easily achievable.

It is not rare to find people everywhere claiming that they win impressive return. Some say they can make 5% monthly, others 10; or even 25% per month.

I even found someone who said that he could win 3% daily without risk.

Do you imagine winning 3 % per day? Do you have a compound interest calculator at hand?

Do the calculations for a 300 days of trading with a 3 % compounded.

What I ask myself is how a guy who makes 3 % per day every day is looking for people to invest in a PAMM account.

At that rate, he should have 800 thousand $ after one year of trading, had he started with 100 $.

It is not bad, is it? What is depressing is that a lot of people believe this fantasy.

Pamm accounts lies?

I mean, even anyone who promises you 10 % per month is either lying or he does not know what he is talking about.

The problem I have found observing quite a lot of these managed accounts out there is the fact that a lot of the most successful accounts (short term success of course) have quite a similar trading style.

By what I see, there are a lot of people who have realized that the best way of making huge returns in a very short period of time, is to make a lot of winning trades with small profits. (close to 100% winning loss ratio) And no stop loss.

Pamm accounts big returns

Doing that, they can make lots of winning trades and make returns of 50, 100, 200 % and more in a matter of months or even a year.

As an example, let’s think of a trader who has ten pips as a winning goal, which equals 1% of his account. So for this account a loss of 1000 pips would be needed to be wiped out.

Normally that trading strategy should have one loss for 100 wins. Every time this trader bets he has a 99% chance of winning.

Well, trading that way it is possible to make fantastic winning streaks of 100, 200 or even more. Imagine that that imaginary trader is lucky and is able to win 200 consecutive times with no loss. If he reinvested those wins, his account would have a 638% return.

What is to say that if he started with 1000 €, the account would be 7380 € after 200 bets.

It is not bad.

And if the trader managed to win 300 consecutive times (0.365*0.365*0.365 = 4.8 % probability to do that), the trader would make 20050 €, which is not bad if we know that the initial probability to get to that amount was 4.8 %.

So, the fact is that the amount of people who try strategies similar of what the one described above is so big that many of them are able to get those returns. And after that they think they are God. Then they publish the results, promote themselves and attract people very easily, either to manage their funds of selling their systems.

It is an easy way of making money.

That example I made was very simple, and many of the managers who follow a similar approach think that their system is different because it is based on whatever (rubbish) indicator.

Pamm accounts edge

They think they have an edge. But the reality, is that the vast majority of them have no edge.

Notice that I did not consider transaction costs, which should be two pips for every trade (If I may say so and depending on the asset and the broker). Those transaction costs would make things more difficult. Because, if I want to win ten pips, the price must rise or fall 12, and therefore the probability factor would worsen for us (1000/10 > 1000/12).

As you can see, trading that way, with small wins and big losses is the easiest way to make huge early returns with no drawdown.

Looking for big profits and small losses is not very common in this world of PAMM accounts (though I have seen some).

It is possible that there are good traders out there with an adjustment trading strategy similar to the options sellers, but I think they are hard to find.

PAMM Account Strategies

There are also those who trade in a more “normal” way, looking for a winning losing ratio about 1, using some indicator and an automated trading system. These people may win for a certain amount of time while conditions remain the same, and their “indicator” performs well. But when sufficient number of speculators notice those patterns, then is a matter of time that those systems start to fail.

Pamm Forex day trading

In short, it is not impossible to find a good PAMM manager that will work for the long term, but it will be very difficult to do so. And much less when a lot of these managers do day trading.

Whoever that wants to invest in this type of investments should study a lot, and see how the managers trade.

If, for instance, we see the performance of one of this accounts and there is a 97-100% (1) of wins, it means that the trader do not use stop loss, and eventually he will face his “black swan” trade.

Like some options sellers, that win money for many years, but eventually they lose all.

This is a very difficult world.

 

  • This can be seen analyzing some PAMM accounts out there.