Social trading has taken on a variety of faces over the years. Forex traders looking for third-party capital and investors looking for savvy traders to invest in have different social trading environments at their disposal. They include PAMM, Copy Trading and Darwinex Darwins.
This post takes a look at the pros and cons of these various forms of social trading from both a trader’s and investor’s perspective.
PAMM for Investors
The Percentage Allocation Management Module approach to social trading allows investors to invest in the trading of savvy traders (PAMM managers) through the broker.
All profits or losses made by the trader are then replicated on the investing accounts in percentage terms. The main distinguishing factor for PAMM is that the trader controls the entire pot of invested capital as one. PAMM is known by many names these days as we can see here and here but the approach is the same.
- Investing in the forex market via PAMM is as simple as filling out a few forms, funding your account and following the trader, from any part of the world.
- PAMM is relatively transparent as elements like the necessary details of the strategy, the number of investors, etc. are usually made public, allowing the investor to make an educated decision.
- You are in control of your investment in PAMM as you can exit the investment at any time.
- You can split your capital and invest in multiple PAMM managers to ensure diversification.
- You don’t have to worry about any calculations as all fees are deducted automatically.
- Withdrawing from the PAMM before the allowed period may attract a fee.
- Many brokers offering PAMM do not provide enough tools to analyse the trading of PAMM managers. Hence, it is challenging to own an adequately diversified PAMM portfolio.
- The performance fees are charged monthly and are at the discretion of the PAMM manager. This could mean managers charging as high 50% of profits as the fee.
- Regardless of the broker, the PAMM environment is generally high risk. The managers have to generate unsustainable returns over time to ensure visibility to investors. So an investor picking some high earning PAMM managers could be walking into a time bomb.
- The borderline toxic PAMM environment also leads to the managers taking unnecessary risks and engaging in poor trading behaviour specifically designed to attract investors. Some of these include: refusing to close losing trades, practising martingale and engaging in super scalping.
PAMM for Traders
As a trader, a PAMM account provides you with investor capital. All you need to do is to sign up with a broker that offers this service and then show that you can generate profits to attract investors.
- As a PAMM manager, you are in control. You can set your performance fees, the minimum investment amount, the penalty for early withdrawal and more.
- You don’t have to worry about attracting investors as the provider ratings can give you visibility if your trading is attractive enough.
- All calculations are done automatically, saving you the stress of understanding them.
- Performance fees are paid monthly.
- Your past trading history is irrelevant with a PAMM account as only your present, and future results will be rated.
- The investors in a PAMM environment are more likely to be swayed by high returns before proper trading behaviour. This is no fault of theirs, as most PAMM providers do not have enough tools to measure trading behaviour.
- You may not be allowed to hide your trading activity from your investors. This could lead to intellectual property theft. Your strategy can be reverse engineered and sold on the same platform or elsewhere hence reducing its efficacy.
- The calculations involved in running a PAMM can be highly confusing.
- Depending on your location, you may be breaking the law by running a PAMM account as the manager.
Copy Trading for Investors
With copy trading, investors subscribe to traders they deem profitable. All trading decisions taken by the trader are then replicated on the investors trading accounts directly, usually for a monthly fee.
- It is an excellent way to make profits in the forex market without special skills.
- Monthly fees are usually $100 or less.
- All trades are copied instantly.
- You can decide how you want the trades copied. Options include mirroring the trader’s positions, entering half the trade size and entering with a certain percentage of your account.
- You retain control of all activities in your trading account as you can see trades taken.
- You can copy as many traders as your account can carry to increase chances of success.
- You can combine your trading with copy trading for better results.
- You need to have the skills necessary to analyse a trader’s strategy before choosing to copy it. Unfortunately, you may not have all the essential tools at your disposal for this.
- The monthly fees charged for copy trading may not be recouped depending on the size of your account. For instance, with a $100 monthly fee and a $1000 account, you will need a 120% return for the year to break even!
- Whether the trader ends the month in profits or loss, you have to pay the fees. Hence, it is not uncommon to find traders that are only concerned about generating commissions.
- The risky behaviours of a trader can still hurt your account. Even though you are in control, you may not react fast enough to adverse trade decisions.
- You won’t have the confidence to keep following the strategy when it is losing. You will want to interfere since you can see the trades.
Copy Trading for Traders
As a trader, copy trading is an avenue to generate more income with your trading skills. There are lots of copy trading sites available today, giving you the chance to earn more from your trading.
- You get to focus on your trading only.
- You can set your monthly fees.
- You get paid up front regardless of trading results.
- Your strategy can go viral with a few months of success.
- You have to generate high percentage results to attract investors (many of them will want to cover their signal fees).
- You can’t import your trading history, so nothing differentiates you from a trader that just created a new account for the first time today.
- Your trading is public to your copiers. This means they can resell your strategy. In the rare examples where copiers pay performance fees instead of monthly payments, they can copy your strategy with a smaller account and then trade the signals on a far larger account to cheat you out of the performance fees.
- The results generated by your trading can be negatively affected by the investors discretionary actions.
Darwinex Darwins for Investors
Darwinex offers a unique approach to social trading for investors. With over $30m invested across the board on the platform, there is no denying the fact that they are quickly becoming a force in this industry. As an investor on Darwinex, you invest in Darwins made from the strategies listed on the platform.
- You only pay 20% of the profits generated over three months as fees.
- Fees are charged on a high-water mark basis which protects you from paying performance fees while the darwin is underperforming.
- There are more than 2000 Darwins.
- Risk management is taken away from the trader. This is a big selling point as social trading investors have been burnt badly by traders going rogue and crashing accounts. Darwinex manages the risk on their Darwins by placing a 10%-VAR limit.
- You can set a stop loss on your investment as well as a profit target.
- Building a diversified portfolio is easier as the Darwinex investable attributes help investors to find unique strategies.
- The Darwinex investable attributes also make it easy to see traders that are practising dangerous trading.
- You retain control of your investments and can withdraw at any time without penalties.
- Even with the investable attributes, finding enough darwins in the crowd to build a profitable portfolio can be difficult for the average investor.
- There are many traders out for commissions alone. They list all kinds of automated strategies that end up failing after a while.
- You don’t have control of the trading.
- The Darwinex environment is generally super conservative when it comes to returns generated. The target for even the best darwins is around 20% per year. It is not the place for you as an investor looking to double your money every year. The image below shows that only 80 darwins out of the 2000+ listed have made 30% and above in returns between May 2018- May 2019.
Darwinex Darwins for Traders
As a retail trader looking for third-party capital in a healthy and regulated environment, Darwinex is an attractive option. You list your strategy as a darwin and then wait for investors to come on board.
- You can import your trading history from elsewhere to instantly grow your ratings instead of starting from scratch.
- You don’t have to worry about any technical details when it comes to managing the invested funds. You only need to trade your account as usual, and the Darwinex system will do the rest.
- Performance fees are calculated and paid automatically, every quarter.
- Your intellectual property is protected. Even if you do not choose to hide all your trading activity, Darwinex automatically hides your last three opened trades.
- You get to compete in the DARWINIA challenge for a share of €4.5m monthly.
- The legal backing provided by Darwinex allows you to run your social trading without the fear of breaking the law.
- Darwinex manages investors. You are not responsible for answering their questions. Similarly, you are not responsible for working to attract investors. This is excellent for traders who are still relatively unknown.
- The Darwinex environment isn’t as cutthroat for traders as other social trading sites. While you may need to make up to 50% monthly on some social trading sites to get attention, a yearly return of 50% on your darwin almost certainly puts you in the top 50 performers for the year on Darwinex.
- If you don’t have two-three years worth of trading history, it may be hard to attract investors. This is because the Darwinex scoring system requires years of data to make a complete presentation of your trading abilities. As long as the EX attribute is still below 10, many investors will not look your way.
- The investors on Darwinex are as erratic and profit-hungry as in other social trading places. If you do not maintain consistency with your returns, you will lose them.
- You will also lose investors if you hit a drawdown of any kind. However, the number of investors that will exit your darwin is determined by the depth of the drawdown.
- Even when you have investors, you can go months without generating any fees. You will only be paid if you are consistently hitting new highs every quarter (at least in line with the purchase price of your investors).
You have seen the pros and cons of PAMM, Copy Trading and Darwinex Darwins, from both a trader’s perspective and an investor’s perspective. Your choice should ultimately come down to your specific goals as a trader or investor.
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