Pros And Cons For Investors
Many investors choose to have someone else manage their forex trading accounts for them. When this happens, it’s called a managed account, and there is an account manager who is given the right to trade for the owner. Generally, account owners will choose a managed account option because they do not want to become involved with the daily trading decisions. In the Forex market, the dynamics and rules of Forex trading are complex and fast-paced, so having a managed Forex account could be beneficial for some people.
Even if your accounts are managed by someone else, it’s crucial to have a clear understanding of how the Forex market works so that you can determine whether or not your account manager is competent.
In fact, it’s nearly impossible to choose the best account manager for your situation unless you understand how the Forex market works. For example, the Forex market often has large, rapid movements that are not seen in other markets. These kinds of movements can cause severe damage (or profit) in your account in minutes. These risks are significantly increased if your account uses leverage. While you don’t need to be the account operator, any account owner must understand the principles of the market that they are involved in.
Once you have a solid understanding of the Forex market, you’ll be able to choose a better account manager. If you find an account manager that you can trust, this frees up more time for you to invest in other areas and expand your portfolio.
When novices enter the Forex market, one of the major drawbacks is their limited background. This lack of understanding causes them to choose account managers that are not entirely competent. While the consequences of this can be as simple as poor communication and misunderstanding, the real risk is loss of profits and loss of deposited funds.
What are some basic concepts that are important in Forex?
Forex investing often causes confusion because “investment” usually indicate something for the long term and receiving payment for the money you have invested. However, in the Forex market, there is very little “return” in the form of dividends, interest, or growth that you can expect to find. Instead, Forex trading is more similar to speculation than value investing.
In short, Forex trading is the act of purchasing one currency using a different currency. As the exchange rate changes from minute to minute between currencies, Forex traders can make small profits based on the differences that have occurred. Sometimes, however, those changes can be substantial, causing significant profits or considerable loss. Another important factor in Forex trading is that all currencies have some kind of interest rate attached to them. Those interest rates are determined by the central bank of the country that is emitting that currency. The difference between these interest rates is used to calculate the rollover swap points that must either be paid by the trader or received by the trader each day.
Being aware of the interest-rate connected to the currencies that you plan to trade is fundamental to being able to profit in the Forex market. Even small changes in a nation’s interest rate can cause a dramatic shift and increased volatility instantly.
Should you let someone else manage your account?
Normally forex trading beginners choose to have someone else trade in their behalf. Probably the most important, and most obvious, advantage to having someone else manage your money is that you are then able to use your time in other ways. This can be dedicating more time to your career, your business, your family, or other investments. Day trading, and more specifically, Forex trading, requires constant analysis and awareness of each market, which changes quite literally every minute. If you hire someone else to manage your account for you, your life and time will be free to do other things.
However, it’s your money, not the money of your account manager. That’s a short way of pointing out that you care a lot more about your money than anyone else ever will. Even if they are a professional, it’s highly probable that they have different accounts to keep track of and will not give your account the same amount of attention as YOU would if you were working on your account full-time.
Also, for most foreign exchange brokers, there are certain conditions or agreements that disallow the owner from going halfway. That means either you do it all yourself, or you hand it off entirely to the broker to manage. You are not able to make a few trades yourself because you had a “good idea.” They manage everything, or they manage nothing. In addition, if you come to dislike or disagree with the management firm that is taking care of your money – and you want to remove your money from that account – there is often a penalty or fee for withdrawing your funds early.
While we always hope that everyone we encounter is going to be honest in what they do, the reality is that with the sheer number of Forex brokers available now throughout the world, it’s highly likely that many of them are not safe nor secure. Probably the easiest way to filter through the thousands of possible brokers you could choose from is by first identifying which top-level regulators regulate brokers. It’s also worthwhile to identify where the company is located physically on the planet. Companies that are headquartered in the Bahamas, the Russian Republic, or Panama tend to be significantly riskier because there is no regulating body in those countries. Three top-level regulators are:
- the FSA in the United Kingdom;
- the CFTC;
- the NFA in the United States.
Another good way to protect yourself from possible loss is by researching the industry standards for managed forex accounts. This includes things like the average rate of return, the average fees, the average risk, and the average transaction speed. Without knowing what the average returns are or what the average risks are, it’s almost impossible to choose a good broker because you will not know if their claims are accurate or false.
How does a managed account work?
The foundation of a managed Forex account is that you contract with an experienced professional Forex trader who will enter trades in your account on your behalf. In general, deposits and withdrawals are restricted from these managers. In other words, they can make trades, but they cannot add or take out any money from your account. This is a crucial detail to identify and make sure that they cannot withdraw your money off into their accounts.
The most common agreement type that is used in the situation is called a limited power of attorney or LPOA. These agreements allow you to maintain full control over your account and also allow your account manager to place trades on your behalf. These LPOAs can also be revoked fairly quickly if, for some reason, you do not want to work with them anymore.
Before you sign any agreement with any account manager, be sure to thoroughly review and understand any fee schedule attached to the contract. Most Forex account managers do not charge commissions per trade but instead, charge up to 30% of the net profits that they have generated for you. There are also several other factors, such as the minimum account balance, that can increase the fees you pay.
After you’ve completed the first two steps:
- feeling comfortable about the idea of someone else managing your Forex account;
- agreeing to the fee structure offered by your account manager;
the next thing for you to do is identify the account type that best fits your needs. This is important because there are many different account types in the Forex market.
Now that you have an account manager, you need to open an account with a reputable broker that your account manager will work with (managers and brokers do not always play nice). The next step after that is to fund your account according to the agreement you have made with the broker and your account manager.
Which is best for Forex trading – full-service or discount brokers?
While there are many different kinds of brokers, most of them can be grouped into two large categories: a full-service broker or a discount broker. Discount brokers simply execute the orders that are placed with them. A full-service broker provides additional services such as financial news outlets, additional trading tools, or access to market analysts.
While a full-service broker might seem like the obvious choice, keep in mind that that additional level of service costs significantly more. Also, the person who will benefit most from those additional services is your account manager, not you directly.
How to choose account managers?
If you elect to have your account managed, then the next step is to determine who will be your Forex account manager. The key here is to always do your “due diligence,” which means you review:
- Their history;
- Their business dealings;
- Their past performance;
- The reviews from previous and current clients.
If you’re not sure how to “do your due diligence”, the main thing to focus on is overall profitability. That, combined with low maximum drawdown, are the two major performance factors to consider when choosing a 4X account manager.
This can sometimes be simplified if you look at the Calmer ratio. The Calmer ratio is a comparison between the rate of return and the maximum drawdown over a particular 3 year period. The higher the ratio, the better the manager.
After you’ve identified three or fewer possible managers based on the past performance, you should look into those three with more detail:
- review the risk profiles;
- review their financial goals;
- evaluate their financial ideology;
- check their reputation;
- see if they have good ratings for customer service and effective communication.
Should you invest in a managed fund?
Instead of opening your own Forex account, another option is to invest in a managed Forex fund. These, at their core, are much like hedge funds or mutual funds. The difference lies in the Forex fund specializing in a small grouping of currencies instead of diversifying through multiple asset types.
Remember that, as a beginner, you should only invest in Forex funds that have a track record of at least three years. If they don’t have at least three years of profit, it’s recommended that you avoid these kinds of funds. While there may be an opportunity in these kinds of funds, the risk is also extremely high.
How can you benefit from a Forex Fund’s Prospectus?
All managed Forex funds have a prospectus. A prospectus is a document that spells out details about how the fund operates and its management style. The prospectus includes information on the fund manager, the trading strategy, the methods used for analysis, along with the time frames for analysis, and risk tolerance of the managers.
Importantly, the prospectus contains performance fees, ratios, percentages, and costs for participating in the Forex fund. Be sure to review these fees carefully to make sure you have sufficient funds to pay the fees.
How do you choose the best Forex fund manager?
Choosing a Forex fund manager is more difficult than it might appear. This is true because there are frankly not very many managed Forex funds available to investors.
The silver lining is that, since there are so few options, choosing among them is relatively straightforward. Remember to compare the performance data of each manager and each fund. Profitability is the key here, but the consistency of profitability is also critical. You can find much of this information on MyFXBook.com, which acts as a digital resume for Forex fund managers.
Lastly, make sure to verify the management company places your money in a secure and reputable account that’s independent of the fund. They should have access to it, but it should be separate from the investment itself. That way, if their company goes bankrupt, your money will still be safe.
- 1 Pros And Cons For Investors
- 1.1 What are some basic concepts that are important in Forex?
- 1.2 Should you let someone else manage your account?
- 1.3 How does a managed account work?
- 1.4 Which is best for Forex trading – full-service or discount brokers?
- 1.5 How to choose account managers?
- 1.6 Should you invest in a managed fund?
- 1.7 How can you benefit from a Forex Fund’s Prospectus?
- 1.8 How do you choose the best Forex fund manager?