What is a PAMM account?
Percentage allocation management module, also known as percentage allocation money management or PAMM, is a form of pooled money forex trading. An investor gets to allocate his or her money in desired proportion to the qualified trader(s)/money manager(s) of his or her choice. These traders/managers may manage multiple forex trading accounts using their own capital and such pooled moneys, with an aim to generate profits.
To demonstrate PAMM accounts further, let’s look at an example:
The participants in the PAMM Account setup:
1.forex broker/ forex brokerage firm
2.trader(s)/ money manager(s)
The investors (say Peter, Paul, and Phil) are interested in reaping profits from forex trading, but they either don't have time to devote to trading activities or don’t have sufficient knowledge to trade forex. Enter the professional money managers (Marcus and Mathew), who have expertise in trading and managing other people’s money (like a mutual fund manager), along with their individual trading capital. The forex trading firm signs up Marcus and Mathew as money managers for managing other investors’ money. The investors (Peter, Paul and Phil) also signup with Limited Power of Attorney (LPOA). The crux of the signed agreement is that investors agree to take the risk for the forex trades, by giving their capital to their chosen money manager who will use the pooled money to trade forex per his trading style and strategy. It also states how much the money (or percentage) the manager will charge as his take for offering this service.
In terms of percentage contribution to the total pooled PAMM fund of $ 15,000, each investor has the following share:
Paul = $4,000 / $15,000 = 26.67% and similarly,
Peter = 23.33%
Phil = 16.67%
Marcus = 33.33%
(The sum total of all shares in the pool always remains 1 or 100%.)
Suppose one trading term passes (e.g., a month) and Marcus manages to make a cool 30% profit on his pool, which now stands at $19,500 ($15,000 + 30% profit or $4,500).
He takes away his 10% charge on profit or $450. The remaining profit of $4,050 is distributed to all investors based on what percent they each have in the total pool:
Paul = $4,050 * 26.67% = $1,080
Peter =$4,050 * 23.33% = $945
Phil = $4,050 * 16.67% = $675
Marcus = $4,050 * 33.33% = $1,350
Total = $19,050