Great news for investors who lack the time or knowledge to trade their own account
Managed Forex Accounts – in which a money manager trades a forex account on your behalf and deducts a fee or fees for the service – represents the third option available to those wishing to pursue some form of hands off trading, the other two being a Forex Signal Service and using Automated Forex Trading Software.
It is undoubtedly the most advanced of such options, because once you have set up the managed forex account with the vendor it is basically set and forget. The account manager takes care of all the rest: market research, entering and exiting trades, risk and trade management, general account management etc.
You pay for this service by various methods, e.g. an upfront fee for joining, ongoing management fees, a percentage of the profits made etc.
Once more, it is imperative for anyone considering such a style of trading to do their own research with respect to these costs, not to mention the reputation and track record of the forex managed account team.
Managed Accounts are ideal for the following traders:
- Those who do not have the time to do their own research with respect to prospective forex trades
- Those who do not have the inclination to do the above
- Those lacking experience or knowledge of the market, but who recognise the potential involved in proper forex trade management
- Those who for some reason, perhaps temporary, lack the confidence to place their own trades
Aside from the above, one of the major attractions for trading some of your money in managed forex accounts is that the fund manager only gets paid when they make you a profit (assuming the miscellaneous costs referred to above are minor).
This is because the major source of their income generally comes from taking a cut of the money they make for you. For example, your account is $10,000. The firm trading your account makes 10% for you in a given billing period, i.e. $1000 profit.
If you had agreed to pay them 30%, their share of the profit would be $300. But if they had made you 20%, they would have been paid twice as much, i.e. $600.
This should be a powerful incentive for the forex account manager to trade your account diligently and successfully.
The major differences between managed forex accounts and automated forex trading software are:
- With automated forex trading software you are responsible for the management of the actual system: set up, maintenance, monitoring etc. With a managed account this responsibility is taken off your shoulders and rests with the forex account manager.
- With automated forex trading software you retain full profits, if any, from the effects of trading the software on your PC or VPS (recommended). With managed accounts you are paid the profits from trading after fees have been deducted. In this case you will potentially be earning less than if you had run a robot yourself, although it could also be argued that a manager will do a better job.
- Account Managers are conservative by nature compared to automated forex trading robots. Whereas the average forex robot could easily suffer a drawdown exceeding 10% this would be considerably less likely with the managed account.
- Following on from the last point is the converse of the risk to reward ratio: the percentage of profits you will make in any given period will be less with the conservative managed forex account than you could expect with automated forex day trading.
Things you should check for when doing your research on forex account management firms are:
- What are the total costs involved in setting up an account?
- What are the ongoing costs involved in having the account open?
- What percentage of profits does the account manager retain from your account trading?
- Are there any other hidden costs involved, e.g. is margin added to spreads to increase the profit that the fund manager makes from trading your account?
- Are there other administration fees, e.g. annual administration fee? This is a very common fee, but some forex account managers do not charge it.
- Is there an exit fee charged if you close the account?
- Is there complete visibility of the account’s trading activity, i.e. what trades were taken when and what results were realised?
- Are your funds segregated, or pooled? The better account managers keep your money in a dedicated segregated bank account with a reputable bank, overseen by regulatory bodies such as NFA (USA), ASIC (Australia) etc.
- Above all, verify the performance of the funds management firm through a third party independent source such as Myfxbook