A Percentage Allocation Money Management (PAMM) account is a form of Forex investment in which several traders who are interested in profiting from Forex trading without active participation can put their collective investments into the hands of a master trader, who then performs the active trading and allocates the profit made from such investments according to an agreed sharing formula, usually in the ratio of each contributing investment. For such an investment to work properly, several measures are put in place by the brokers on whose platforms the PAMM investment will take place.
a) The master trader must have a history of profitable investment, and must be able to grow an initial contribution to the PAMM account made out of his pocket. This initial PAMM investment will represent the master trader’s equity contribution into the PAMM investment pool, so as to ensure full commitment to ensuring profitable outcomes.
b) The contributing investors will then have an opportunity to assess the performance of master traders, before putting in their money. It is this assessment process that this article will look to demystify, using the examples of 5 traders on the FXOpen platform.
Assessing PAMM Master Traders
Every PAMM platform has metrics on which master accounts are rated. The problem is that many would-be “slave” account owners do not know how to rate masters to follow, and they end up using PAMM traders with less than average results.
On FXOpen, the metrics used in rating master accounts are:
a) Total % gain
b) Daily % gain
c) Account age
d) Maximum drawdown %
e) Gain chart (also known as performance chart)
The snapshot below displays a list of PAMM master traders with their performance metrics. The big question is: how can you assess each of the listed PAMM master traders so as to decide which one to follow?
The best masters to follow are those with the following characteristics:
a) A steady uptrend in the gain chart, not one with spikes or sudden drops, and definitely not one which has flattened out or even dropping off in a downward trend.
b) A low maximum drawdown %. Drawdowns are a measure of how much a trade goes against a trader before becoming profitable.
c) An account age of at least 12-18 months. This is a measure of consistency.
d) There are some other metrics which indicate the trading habits of the master trader. These habits may include how entries are set, whether profits are allowed to run, etc.
Daily gain % is not very important because it does not paint a complete picture of a master trader’s long term consistency.
Let us look at 3 master traders on the FXOpen PAMM Leaderboard to demonstrate the assessment process.
1) Master Trader ECNp20
The first thing would be to look at the performance chart/gain chart. The performance chart will tell you at a glance, the story behind the master trader’s performances. We can see that for this trader, there is a smooth and gradual increase in the gain chart, showing that this trader has shown an ability to make consistent profits with time.
Clicking on the username of this master trader takes us to the next screen where the gain chart is expanded to show the results from the year the trading career commenced till date.
We can see the steady and consistent shape of the uptrend in the chart. In addition, the left side of the snapshot shows further details of the trading history. ECNp20 has gained 1,708% in three years, but this has come at a relatively high drawdown %. A look at the advanced statistics of this master trader will show the following:
This shows that:
a) ECNp20 is consistent in profitability.
b) Max drawdown % is 61.64%. This is quite high and may be too risky for many traders. Ideally, drawdown % should not exceed 50%.
c) This trader has been around for three years, so his results are not a fluke.
d) He has also tried to keep exposure levels low. At just above 32%, it means that the trader had enough capital (roughly $10,000) and did not have to resort to taking excessive risks to achieve profitability of 1,708%.
This master trader has some drawbacks though. His best trade is half of what his worst trade was. This shows that he has a tendency to let losing trades run in the hope of a recovery. This may count against his strategy at some point in the long run.
2) Master Trader ECNp40
The gain chart of this master trader shows an uptrend in terms of growth of the account, but the shape of the curve is flatter than that of ECNp20. When the chart is expanded, the finer details become clearer:
Profitability is much reduced: it is just about 298% gain in two years. Furthermore, there is more choppiness to the graph, showing that there are more trades, and greater number of losing trades than the master trader ECNp20.
The single greatest losing trade is also far above that for ECNp20. Furthermore, the ratio of the best trade to the worst trade is 1:4, which shows a marked tendency of not knowing when to cut losses, and taking profits quicker than should be done. We also see a shocking statistic. Even though the drawdown % was just below 33%, a massive 92.66% was the exposure level for this account, meaning that excessive risk per trade was deployed to produce the percentage gains on a $5,000 account size.
This master trader’s gain chart shows a consistent uptrending performance, making him worthy of consideration. When the gain chart is expanded, this is what we get:
This trader has been around for 18 months, with a 202% profit in that time frame. Although the maximum exposure level is 88.28%, this trader’s maximum drawdown % is only 13%. This is an indication of a trader who only trades positions that he is sure of, with solid entry points that give up little to the market in terms of negative swings.
When the advanced settings are looked at, we also see some other statistics:
The expectancy of pips per trade is 42.5 points, which is much higher than that of the previous two master traders (28.3 points and 34.7 points respectively). The worst trade was also much lower than for the first two traders, while the best trade also exceeded that of the previous two master traders, and the ratio of the best trade to the worst trade was at about 4:1, which shows clearly that this trader allows profits to run but also cuts down on losing trades.
If you were a trader looking for a master trader’s PAMM account to invest in, which would be the best choice?
Of the three master traders, DimitriyECN’s PAMM account would be the best to follow for the following reasons.
a) DimitriyECN balances profitability with caution and risk management. We can see that he trades only positions he is sure of, sets great entry points that do not allow for much drawdowns, and allows the trade position to run.
b) The single best trade is larger than those of his counterparts, while his single worst trade is less than is obtainable with the other two traders. He also has a positive ratio when the best trade is compared to the worst trade. This is a sign of a trader who cuts his losses and lets his profits run. The other two traders tend to let losses run while quickly taking profit.
c) Gain chart for DimitriyECN shows the greatest degree of uptrend consistency. There are virtually no wide spikes or fluctuations in profitability.
When looking at the performance of master traders, the following must be done:
a) Use the gain chart as the first selection tool. Use a chart which is in an uptrend, with little spikes or fluctuations along the way.
b) A master trader’s trading history should span at least the 18 previous months.
c) The amount made on the best trade should be far above the amount lost on the worst trade.
d) Profit expectancy in terms of pips per trade should be high; a figure above 35 points is suggested.
e) Select a trader whose profitability bar under the “Advanced Statistics” metric is at least 75%.
f) Avoid traders whose expanded gain chart indicates a lot of choppiness. Use master traders whose gain chart shows a smooth, uptrending pattern.
These guidelines are not set in stone and you should also remember that past performance is not indicative of future results. This guide is only for instructional/educational purposes and should therefore not be seen as an endorsement of any master traders on FXOpen. The selection of master traders in this article was done randomly and only for the basis of comparison of metrics. You must therefore perform your own due diligence before committing money to a PAMM account.