If you are thinking of starting your own FX trading managed account, you need to be prepared for some serious risk-taking. You also need to clearly understand what it means to have a forex-managed account. There are different types of accounts in forex trading, and each has its own advantages. Let us try and understand what the benefits and risks of having a managed account are.
There are three main types of accounts in forex trading – standard, mini, and managed. A managed FX trading account is one in which the capital belongs to you, but the decisions to buy or sell trades are not yours. The managed account is handled by account managers, similar to how stockbrokers handle stock managed accounts. The objectives for the trading account will be set by you, but the work will be done by the account managers.
Managed accounts may again be of two types – pooled funds and individual accounts. In a pooled fund, your money may be invested in a mutual fund along with that of other investors, and the profits earned from the mutual fund are shared among all investors. Pooled funds have a higher risk-reward ratio.
Individual accounts are handled separately by the account managers or brokers, making investment decisions independently for each trader.
The biggest advantage of having a managed trading account is that you get expert guidance. Since your investment decisions are being overseen by a professional forex broker, the chances of success are higher. Also, it allows you to diversify your portfolio and venture into other markets instead of just monitoring your forex account all day.
The downside of a managed account, however, is that it can be a little more expensive. You usually have to set funds aside for both pooled accounts and individual accounts since most brokers adopt a hybrid strategy for better rewards. To add to it, there will be a certain commission that the broker will charge for managing the account.
Also, if your account manager or broker is not reliable enough, you may end up losing trades as you cannot decide opening or closing a trade on your own. It all depends on your broker’s strategy and capability. As long as your broker is right and you have enough capital, this should not be a problem.
Opening a managed account is no big deal. Any good forex broker can open a managed account for you. But before you go ahead, you need to take a few things into consideration and decide what would be best for you.
The first thing to keep in mind when opening a managed FX trading account is your account manager’s Calmar ratio. The Calmar ratio is an indicator to measure the performance of any Commodity Trading Advisor, in this case, your broker. A high Calmar ratio indicates good risk management and risk-reward ratio of a broker.
Also, make sure that your account manager is fully licensed by any of the tier-1 or tier-2 regulators to ensure that they are authorized to trade.
There are three different ways in which a trader can earn from a managed FX trading account. These are – performance fees, rebates, and management fees. Also, if you are hiring an account manager, these are the fees they will be charging from you.
Performance fees
Performance fees are paid to the account manager or trader every time you earn a profit from a trade, usually in the form of equity gains. This is a good tool to align the interest of the trader with yours as an investor. Since the trader gets a cut of the profits, they will try their best to make the trades successful.
Rebates
In this type of income, the trader gets a part of the spread every time they open or close a trade. This income, however, is often criticized as it can drive traders to overtrade or take greater risks on the investor’s money. This is unfair to the investors, and many consider this unethical.
Management fees
This is a fixed fee paid to the broker or trader for maintaining the managed FX trading account. This can be a certain fixed percentage of the fund being managed per year.
An FX trading managed account can be a big relief for investors who have enough funds to spare or don’t have the time to manage their accounts on their own. There are risks involved too but with a few smart decisions, you can get much better rewards from a managed account.
What is an FX trading managed account?
There are three main types of accounts in forex trading – standard, mini, and managed. A managed FX trading account is one in which the capital belongs to you, but the decisions to buy or sell trades are not yours. The managed account is handled by account managers, similar to how stockbrokers handle stock managed accounts. The objectives for the trading account will be set by you, but the work will be done by the account managers.
Managed accounts may again be of two types – pooled funds and individual accounts. In a pooled fund, your money may be invested in a mutual fund along with that of other investors, and the profits earned from the mutual fund are shared among all investors. Pooled funds have a higher risk-reward ratio.
Individual accounts are handled separately by the account managers or brokers, making investment decisions independently for each trader.
Pros and cons of an FX trading managed account
The biggest advantage of having a managed trading account is that you get expert guidance. Since your investment decisions are being overseen by a professional forex broker, the chances of success are higher. Also, it allows you to diversify your portfolio and venture into other markets instead of just monitoring your forex account all day.
The downside of a managed account, however, is that it can be a little more expensive. You usually have to set funds aside for both pooled accounts and individual accounts since most brokers adopt a hybrid strategy for better rewards. To add to it, there will be a certain commission that the broker will charge for managing the account.
Also, if your account manager or broker is not reliable enough, you may end up losing trades as you cannot decide opening or closing a trade on your own. It all depends on your broker’s strategy and capability. As long as your broker is right and you have enough capital, this should not be a problem.
Choosing the right managed FX trading account
Opening a managed account is no big deal. Any good forex broker can open a managed account for you. But before you go ahead, you need to take a few things into consideration and decide what would be best for you.
The first thing to keep in mind when opening a managed FX trading account is your account manager’s Calmar ratio. The Calmar ratio is an indicator to measure the performance of any Commodity Trading Advisor, in this case, your broker. A high Calmar ratio indicates good risk management and risk-reward ratio of a broker.
Also, make sure that your account manager is fully licensed by any of the tier-1 or tier-2 regulators to ensure that they are authorized to trade.
Types of income generated from managed FX trading accounts
There are three different ways in which a trader can earn from a managed FX trading account. These are – performance fees, rebates, and management fees. Also, if you are hiring an account manager, these are the fees they will be charging from you.
Performance fees
Performance fees are paid to the account manager or trader every time you earn a profit from a trade, usually in the form of equity gains. This is a good tool to align the interest of the trader with yours as an investor. Since the trader gets a cut of the profits, they will try their best to make the trades successful.
Rebates
In this type of income, the trader gets a part of the spread every time they open or close a trade. This income, however, is often criticized as it can drive traders to overtrade or take greater risks on the investor’s money. This is unfair to the investors, and many consider this unethical.
Management fees
This is a fixed fee paid to the broker or trader for maintaining the managed FX trading account. This can be a certain fixed percentage of the fund being managed per year.
Conclusion
An FX trading managed account can be a big relief for investors who have enough funds to spare or don’t have the time to manage their accounts on their own. There are risks involved too but with a few smart decisions, you can get much better rewards from a managed account.
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