The popularity of forex trading is reaching the skies as more and more people are aware of the profitable opportunities that are there in the global currency market. But trading yourself in this volatile market is nothing less than a challenge, and it’s not everyone’s cup of tea. Many beginners either lack the time and resources to learn trading themselves, or they simply have this fear of failure due to their lack of knowledge and experience. Thankfully, the forex market also gives these types of traders equal opportunities. You can still earn from forex trading by either investing or copy trading.
But which of these options would be better is the burning question many forex enthusiasts ask. And in this article, we will try to answer this question by doing a comprehensive review and comparison of these innovative trading approaches.
- How to Invest in Forex?
Before we get into the various methods through which you can invest in the forex market without trading yourself, you need to understand what it actually means to invest in forex. Investing in forex is a lot different than any other regular form of investment, which is done in other financial markets. Because in the forex market, there is only trading, and we cannot just invest in currency pairs which are the trading instruments here. Here, your funds will still be utilised for trading, but you don’t have to get actively involved in the trading process yourself.
Investing in forex means investing funds in a trading account which will be managed by a professional trader on your behalf. In simple words, investing in forex is funding a managed forex trading account, where an expert trader’s account will be linked to yours, allowing them to use your funds for trading and managing all trading activities of your account. The profits generated in trading will be divided between managers and investors based on the conditions agreed upon at the time of investing.
Managed account services have become a popular method for passive traders and beginners to get some market exposure and earn profits without much effort. To invest in managed accounts, you must find a suitable platform that offers this type of service and sign up with them. Then, you can choose a top trader to manage your account from the options available on that platform. Then, these managers will perform all the trading activities, and you get to avail yourself of the benefits of trading.
- Different Ways to Invest in Forex
There are different types of managed account services via which you can start investing for forex trading. But the most popular account types are MAM accounts and PAMM accounts.
MAM- The full form of MAM is Multiple Account Manager, which is a self-explanatory term. The one who is in charge of managing the trades simply manages multiple trading accounts on behalf of their clients. MAM accounts are a popular choice for investors who want to entrust their trading activities with an experienced trader. The best thing about a MAM account is that the investor gets more flexibility and choice in regard to how their funds will be used for trading.
They can set their own parameters for the amount they wish to risk for trading, and the account manager or top trader can only trade within the parameters set by the investor. There will be a lot of investors with different risk profiles, and the MAM manager can still easily manage the accounts due to the advanced technology. The investor accounts are linked to the main account, making trading convenient for both the manager and the investor.
MAM accounts give more options for investors who have some knowledge about risk management and wish to manage the risk themselves. They get to maintain their risk profile as per their preference by setting some conditions and choosing the fund allocation mode. It can be the perfect account type for those who have some know-how and understanding of trading but lack time to do it themselves.
PAMM – The full form of PAMM is Percent Allocation Management Module, and just as the name suggests, this managed account follows a percentage allocation method. The investors will be allocated a percentage of the profits/ losses based on their trading account balance and margin levels. It is quite different from a MAM account as the investors don’t have as much risk management authority.
But they are very much similar in functioning and use the same type of technology for operating. The PAMM manager will be trading on their master account, and the results of these trades will be reflected in the sub-accounts of investors who follow them for trading. This account type is ideal for traders who lack enough knowledge to manage their own risk or set parameters.
So, those who are entirely new to forex trading and don’t want to get engaged in fund allocation or risk management themselves can surely opt for a PAMM account service, as this can be a perfect starting point for you as a beginner or passive trader. The type of account you choose for investing should be in accordance with your knowledge level and the amount of control you wish to have in risk management.
Pros & Cons of MAM & PAMM Accounts
- You get to benefit from the expertise and experience of a top trader or account manager.
- You don’t have to trade yourself, which takes a lot of burden off your shoulders.
- The risk of trading is minimised with managed account services as they are already professionals who know the market well.
- You get a hands-off trading experience.
- You can always remove an account manager if you see a drop in their performance.
- You cannot enter, or exit trades yourself.
- A part of your profits will be used to compensate for the services of account managers.
- There is no guarantee of profit in all situations as market risk remains.
How Does Copy Trading Work in Forex?
Copy trading is another popular way to earn from forex trading without trading yourself. Here, you won’t be investing in managed accounts but simply engage in copy trading by following a top trader of your choice. The top traders who wish to share their trading system or strategy with others will do so by joining copy trading platforms supported by forex brokers. The traders who wish to copy trade should also join these platforms and choose a trader whom they wish to copy. They can also copy multiple traders for diversification which is a good way of managing the risk. Another good way of managing the risk is using a trading calculator, which helps you determine the profit and loss, pip count, lot size, margin and other parameters. Getting information about these values will help you trade with the right quantity and enter and exit at the right time.
Choosing the top traders who align with your trading goals and risk tolerance is important for getting desired results from copy trading. These days, most copy trading platforms are automated and the trade positions of the top traders that you follow will get copied to your trading account automatically in real-time. Copy trading can be perfect for those who don’t want to spend much time trading and just want to replicate trades with a higher profit potential.
You can also engage in demo trading on copy trading platforms which is a good way of testing the trading systems you wish to copy. You can sign up for an account with a broker who supports the chosen copy trading platform.
Pros & Cons Of Copy Trading
- Requires no prior knowledge or experience in trading
- You can get some market exposure without much effort.
- You also get to see the entire trading history of top traders, which is a good method for learning.
- You don’t need to spend much time and can earn passively.
- You don’t get control over trading activities.
- The past performance of a trader does not give a guarantee of profits
- You may have to pay a fee for copying trades, which varies based on your platform or broker.
- A minimal amount of risk is still there.
So, the final answer to the question we raised initially will be different for each of you based on your preferences. Our final verdict on forex investing and copy trading is neutral, as both options are feasible for those who are unable to trade on their own. Investing in managed accounts and copy trading are both equally beneficial if you take some time to research and make sound decisions based on your personal trading goals. We cannot say one is better than the other, as both offer great profit potential for passive traders.