Ultimate Guide (7 Secrets) To Find Best FX PAMM – Part (2)
La Bella Princessa, a $150m Leonardo, or a highly skilled copy worth just $20,000? (“La Bella Principessa: The Story of the New Masterpiece by Leonardo Da Vinci ” Book). Since 2008, the year Peter Silverman American art dealer fabricated a thrilling discover story of finding it in his friend’s drawer (the truth was that New York art dealer Kate Ganz acquired the drawing at Christie’s in 1998 for $21,850 catalogued as 19th century, possibly German and she sold it, with the same attribution and for the same amount, nine years later to Silverman), the authenticity of this 330mm x 39mm painting has been a hotly contested topic.Many experts casted the doubt on it, but in 2010,
Martin Kemp emeritus Professor of Art History at Oxford and a recognized expert on Leonardo’s scientific work published a book titled “La Bella Principessa: The Story of the New Masterpiece by Leonardo Da Vinci ” together with a reputable engineer Pascal Cotte (left photo shows these 2 authors). The book strongly supports the idea of Leonardo’s authorship and named the portrait as Bianca Sforza, an illegitimate daughter of the Duke of Milan. The summary of can be their detective work & scientific analysis which I found in the Lumiere-technology (founded by Pascal Cotte). Authenticating a centuries-old artwork, especially a potentially rare, extremely valuable Leonardo, is seldom a clear-cut objective process.
Well, Forex PAMM (Percent Allocation Management Module) accounts are mushrooming in various FX brokers as a handy passive income opportunity though unfortunately many of the PAMM managers (traders) are not capable but extremely short-lived by taking aggressive strategy which may mislead you to recognize them as skillful high-achievers. Therefore we need clear-cut objective process of evaluating & selecting the top money managers who will earn decent & importantly sustainable profit to investors. I hope the information in this article will provide you with a good insight & specific guidance to read the true meaning of the published numbers behind. Leonard da Vinci used to say “There are three classes of people: those who see. Those who see when they are shown. Those who do not see.” I’m sure you would like to be “Those Who See” especially when it comes to the passive income because it fully depends on other people’ expertises. Check the below criteria which allow you to see the true colour of the traders transparently like the below crystal clear water;
As the title implies, this article is Part 2 of Ultimate Guide(Seven Secrets) To Find Best FX PAMM, then for those who haven’t read “jump Part(1) The whole purpose of this article series is providing you with The 7 Secrets To Find the Best FX Managed Account (PAMM), and the framework of the secrets outlined in Part (1) are;
- Basic Disciplines (Yourself)
- Institution Assessment (Broker / Managing Company)
- Expert Verification (Trader)
Part (1) covers Basic Discipline (Yourself) and Institution Assessment (Broker / Managing Company), then this Part (2) focuses on
Expert Verification (Trader)
which actually is the most critical for your profit.
I divide Expert Verification further into the following 3, which makes up 5) – 7) secrets out of Seven secrets;
- 5) Professional Background & Fee Structure
- 6) Trading Strategies & KPI (Key Performance Indicator)
- 7) Risk Management Setting
So, let’s go through one by one.
Seven Secrets to Find Best Forex Passive Account
Expert Verification (Trader)
5) Professional Background & Fee Structure
The first critical thing you need to do is to define the “accountability” of the trader including the point if the trader is licensed or Unlicensed (private) to clearly understand what your risks truly are. The followings are characteristics generally found in each trader:
☑If a trader is licensed, they are accountable for mistakes and will ☞ usually do their best to grow your account, in other words, they always try to mitigate their risk and achieve steady profits, not aim for record-setting returns.
☑On the other hand, private managed traders tend to be risk takers thus may have higher yields at times, and have their own interests in mind when trading the money of others. In short, investing with private managed traders is risky, and most success is usually short-lived.
There are many jurisdictions where the FX trading is not regulated, accordingly trader is allowed to invest OPM (Other People Money) without license or certification . Therefore No Licence is Not directly led to the above conclusions, but clearly you’d better make more careful check on all the following points.
A. Background / Past Track Record
✓ Criminal Record:
– Use free on-line public record search such as CheckPeople to see if there is any hidden information.
✓Past Trading Record – Avoid the one showing:
– months with 25% or more in losses (draw-downs)
– negative yields any more than 3-4 months per year
These could be a sign that their strategy may not be as sound as they claim and future problems with your account. Make sure the track record is something verified by the 3rd party. If you are speaking with a private FX trader, all yields you see could be hypothetical.
If a trader does not have a track record or licensing history of over 2 years, it is risky to invest with them. Usually, over the course of 2 years, there will be a huge event in the market which will test the experience of a trader. Unfortunately, it is very rare that any trader will stay successful without major collapse and licensed for this 2 year period. Those who do last are the best of the best, and are usually the ideal traders to invest with.
B. Fee / Commission Structure
Generally speaking, avoid money managers that charge significant transactions-based fees. You will have an inherent conflict of interest with any money manager that sees his income grow in a significant way from anything other than the size of the accounts he manages & frequency he trades. Even those systems based on annual profits raise fundamental conflicts of interest. It entices the money manager to pursue overly risky investments: He or she won’t have to pay you during the years your account suffers losses, but the years that see record profits, the manager gets a percentage of that. I will explain the detail check points about Fee in my separate article.
6) Trading Strategies & KPI (Key Performance Indicators)
Numerical Criteria of Operational Control to be Checked. You may want to check the following points (firstly you should confirm if they set these basic KPIs) to evaluate if the account fits your own target profile. Bear it in mind that the green numbers are just my own subjective norm as a modest risk taker and can’t apply universally:
A. Return Target – Conservative / Modest / Aggressive
Review again the general profile by return range explained in Part(1) article and see which return target fits your strategy & risk tolerance. You may achieve yields 200+% per year with the aggressive risk trader, in all reality, you should be looking for the one that will perform consistently over the long haul. As repeatedly said, chasing high yields can lead to short term success, but in the long term, steady traders will always come out on top. Most managed accounts will barely exceed 50% per year, however there are aggressive ones making 5 – 20% per month. You really have to be aware of your risk tolerance level, because making higher figures means your trader loves to risk your money (this is not necessarily bad thing if you are aware and accept it). Remember, if you can find a trader with yields exceeding 150%, they will usually also have a few relatively big losses on their track record, which modest risk taker may not be tolerable.
B. Amount of Capital Under Management
The total capital amount affect the trader’s yield capability. Certain traders may make amazing yields with less than 10M under management, but as their fund grows, their strategy starts to show its holes. As many traders learn the hard way, trading with more funds increases your chances of “slippage”, which in return affects the prices you enter and exit at. When you are implementing 500 positions at once, it is a lot easier to earn high yields than with 5,000 positions. In other words the account with large amount of money (50M+) tends to lower the yield (this is just general observation). In any case, it is good to ask the trader to explain their plans for new growth, and how their strategy will adapt to it.
C. Win to Loose Ratio (%)
This is probability of success. For example, a win to loss ratio of 20:10 would indicate that a trader makes 20 profitable trades for every 10 losing trades. This ratio could also be given as 2:1, or as 200% (calculated as ((20 / 10) * 100) = 200), meaning that there are twice as many profitable trades as losing trades. The win/loss ratio is used to determine if a trading system is likely to be consistently profitable. It is not very useful on its own because it does not take into account the monetary value won or lost in each trade thus often used together with the risk/reward ratio explained below. The above example of 200%, sounds good, but if the losing trades have dollar losses three-times as large as the dollar gains of the winning trades, the trader has a losing strategy. Professional traders know that at best they will win on 60-70% of their trades, they understand they will lose on any where between 30-40% of their trades, in other words if target is over 250% looks too optimistic.
D. Risk / Reward Ratio
It is a parameter that helps a trader to determine how much a trader is risking versus the potential reward (or profit) on a trade. While this may seem simplistic, many traders neglect taking this step and often find that their losses are very large. If the risk is $200 and the reward
is $400, then the risk-reward ratio is 200:400 or 1:2, which is a minimum risk-reward ratio though it depends on other parameters such as the above Win to Loose ratio (see below F. Expectancy Formula for more details), anyhow the larger, the better and 1:3 is said to be appropriate. It is based on the theory that if only 33% of your trades are successful (combining the above Win to Loose Ratio here), then you will still make a profit. Example of 3 trades;
1st Trade – Risk (loose1) $100 : Potential Reward (win3) $300 – trade loses – ($100)
2nd Trade – Risk (loose1) $100 : Potential Reward (win3) $300 – trade wins – $300
3rd Trade – Risk (loose1) $100 : Potential Reward (win3) $300 – trade loses – ($100)
– Combining all 3 trades, even 33% win ratio, $100 profit!
E. Sharp Ratio
Measure of the excess return per unit of risk in an investment asset. It characterizes how well the return of an asset compensates the investor for the risk taken. Given the definition, it’s clear that the higher sharp ratio gives more return for the same risk, to give you some insight, a ratio of 1 or better is considered good, 2 and better is very good, and 3 and better is considered excellent. The US long-term average stock market (S&P500) sharp ratio is around 0.5. In fact, this is important indicator when you construct your portfolio. The more you include better sharp ratio assets, the safer your total portfolio would be – safer means you can expect higher return with lower risk.
F. Expectancy Formula
I found a comprehensive Investpedia article introducing Expectancy Formula that uses a few of the above parameters, I extract it as below;
“Every trade you record should be based on only one particular system, which will then give you the ability after 20 trades or so to calculate the expectancy or reliability of your system.
Here again is the expectancy formula:
E= [1+ (W/L)] x P – 1
W = Average Winning Trade
L = Average Losing Trade
P = Percentage Win Ratio
If you made 10 trades, and six of them were winning trades, four losing, your percentage win ratio would be 6/10, or 60%. If your six trades made $2,400, then your average win would be $2,400/6 = $400. If your losses were $1,200, then your average loss would be $1,200/4 = $300. Apply these results to the formula and you get: E= [1+ (400/300)] x 0.6 – 1 = 0.40 or 40%. A positive 40% expectancy means that your system will return you an additional 40 cents over every dollar in the long term.”
Percentage win ratio of 60% refers to C. Win to Loose Ratio and $300:$400 = 1:1.33 is Risk/Reward ratio here. You can see now that if you can achieve 60% win to loose ratio, you will be profitable even even with such lower risk/reward ratio of 1:1.33 provides you profit.
7) Risk Management Settings
A. Stop / loss Placement
This is an order placed with a broker to sell when it reaches a certain price. Stop loss is a must from better risk management perspective, because this functionality provides Investors with control of risk of loss. Setting a stop-loss order for 10% below the price you paid will limit your loss to 10%. This strategy allows traders to determine their loss limit in advance, preventing
emotional decision-making. Investors are given the possibility to block trader’s activity beyond a certain drawdown level. This is critical to address, since some traders can involve ego in bad trades and “let it ride” well past the “draw-down limit” that is intolerable, hidden risks are identified. There is no particular guide for specific % but depending on individual environment & strategy though, 5-25% seems to be popular & safe range per trade but it should be controlled as the below Risk% that is a notion of overall money management rather than risk control for each trade.
B. Draw-down Limit Placement
If you are working with a licensed trader, large draw-downs can usually be avoided, but with offshore private traders usually not the case. Check if they have guarantee a max drawdown limit, which should be controlled by the below stop/loss practice. Unless you’re very aggressive investor, you may want to see less than 30% draw-down maximum.
C. Leverage Level
Traders usually use leverage to significantly increase return by using margin accounts, simply put leverage is a loan without interest that is provided to an investor by the broker, the highest ratio they can do in Forex margin account goes up to 400:1 in off-shore FX brokers, means if you have $10,000 cash in your account, the broker allows you to trade up to $4,000,000 – this is margin-based also real maximum leverage (understand the difference between margin-based and real leverage, since most traders do not use their entire accounts as margin for each of their trades, their real leverage tends to differ from their margin-based leverage, means in the above example if the trader use only $200 as 2% of total capital for particular trade with 400:1 margin based leverage, the traded amount is $80,000 and the real leverage is 8:1 because $80,000 vs $10,000 as total capital in your account). You can imagine that it is a double-edged sword or a big sledgehammer, in other words leverage has the potential to enlarge your profits or losses by the same magnitude – with leverage, you stand to gain profits that are calculated with leverage and this enables you to make substantial profits from successful trades. However, when you lose a trade that losses are also calculated according to the leverage that was extended to the trader. So, you can make huge losses in the same way that large profits were possible. The greater the amount of leverage on capital you apply, the higher the risk that you will assume. Swing it slowly and carefully is basic risk management theory. A highly leveraged trade can quickly deplete your trading account if it goes against you thus this is one of the key numbers you want to check with your trader, there is no particular guideline of proper leverage but the trader always use over 200:1 in margin-based leverage (say real leverage could be 4:1) for every single trade looks a bit excessive and risky.
D. Risk %
This is a loosing % against your entire equity by any 1 trade. Popular method is 1% risk rule which states that no more than one percent of a trading account may be risked on any single trade. In other words, if a trader has a $100,000 account, the maximum amount that they can
risk is $1,000 per trade. The reason behind is to control the maximum negative impact on your whole capital in the account caused by each trade, namely try to make sure that no single trade has the ability to blow up a trading account. Traders that abide by the one percent risk rule, are much more likely to survive an unexpected losing streak, than a trader that risks half of their account on each trade. Understand the difference between stop/loss per trade and risk %, in the above example, when you place only $2,000 out of your total capital of $100,000, 1% risk control means 50% stop/loss on this particular trade because, $2,000 x 50% = $1,000 loss / $10,000 = 1% Risk out of your total capital. Risk % is actually that you are emotionally ok with losing on any one trade. Most traders cannot operate emotion free after losing more than 3% of their account value on any single trade. As such, risking 2% or less is a sort of guiding % for any trader.
Let me show you just a simple winning formula using the 3 key parameters. Win to Loose Ratio & Risk / Reward from 6) Trading Strategies & KPI (Key Performance Indicators) and Stop / Loss Placement from 7) Risk Management Settings. I use pip term to give you more realistic picture, let’s set the below assumptions which are not unachievable KPI for experienced trader;
X) Win to Loose Ratio — 60%
Y) Risk / Reward Ratio — 1: 1.5 (, which can be 20 pips : 30 pips)
Z) Stop Loss Placement — 20 pips
So, profit target is 30 pips and stop loss is always 20 pips or less.
When trader performs 10 trades and wins 6, then:
6 x 30 pips = 180 pips profit
4 x 20 pips = 80 pips loss
Net profit is 100 pips and average 10 pips per trade.
Bottomline, if you can identify the trader who makes such disciplinary trade of X), Y), & Z), you will be profitable, in other words these are key parameters you need to validate. Probably, these traders will not make you instant rich but will give you steady solid passive income which may be enough as your safetynet.
I know some of you are still inclined to prefer HIGH YIELD despite the awareness of underlying risk with the belief of “if I don’t risk much, I can’t make much”. Surely it’s true, but in case you have nothing left in your account you can’t make anything. Say without even 0 leverage, under 1:1 of Risk/Reward ratio & Win/Loose ratio (means 100%), If you Risk 50% – you will wipe out nearly whole money as soon as you have 3 consecutive losing trades as below:
- Suppose trader has $100,000 in the account.
- Risk $50,000 for the chance to make $50,000 (a 1:1 ratio)
- If the trader wins, the account to be $150,000, fantastic.
- However, if looses, only $50,000 is left and the trader needs to double $50,000 to get back to the starting point.
- If the trader continues the same strategy and risk half the account
- Then, fails again, only $25,000 is left. Now the trader has to quadruple the account to get back to where you started.
- Fail one more same trade results only $12,500 balance.
- You see just 3 consecutive losses wipes out 87.5% of your account
, which is practically broke, isn’t it?
Aggressive trader without proper risk control discipline may do this ridiculous mistake in panic to recover the 1st loss – if the trader employs Martingale tactics (This is a common practice in gambling places like Las Vegas), you will see complete loss of your capital instantly. This is a bit extreme case, but in reality HIGH YIELD PROGRAMME TRADER does more or less the same way behind the scene, that’s why you’d better know specific risk control rule of the trader to detect intolerable hidden risks. Without clear identification of them, you are doing gamble rather than investment, I can’t stress more that knowing trader’s Risk Control is very important and judging if the control level fits your risk tolerance level is paramount important. Allow me to quote Sun Tzu’s Art of War word again, “if you know the enemy (trader should not be your enemy though) and know yourself, you need not fear the result of a hundred battles.” – for more details pls read my separate article click HERE , yes it speaks everything I want to convey here.
BTW, needless to say, any observation of significant gap / inconsistency between what they claim and the actual numbers suggest you take very cautious approach toward such programmes.
Finally, let me remind you that a good dose of your own common sense is always helpful before making your final decision – Never ever forget, in investment world, anything you feel “Too Good To Be True” is unfortunately Not True.
Pascal Cotte’s Lumiere Technology site concluded with the below 2 analysis images that “Now we can be sure that the portrait depicts Bianca Sforza, inhonour of the celebration of her marriage in 1496, and that Leonardo was the artist: the book is dated and the provenance confirmed. There is only one artist working at the Sforza’s Court who drew with his left hand, Leonardo Da Vinci. This discovery should put an end to the controversy“.
However, there are yet a lot of opponents and the debate could rage on indefinitely. When it comes to FX PAMM, we don’t have time to keep arguing but need to make timely decision. Leonard said Learning never exhausts the mind, yes let’s keep learning and sharpen our judgement. Kemp commented “Should the day come when Bianca Sforza’s face hangs in a museum as a true Leonardo, everyone will stare.”, well I’m sure you would like to stare true excellent PAMM mangers before that day comes.
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