How does a managed forex account work and should you open one?

Trading profitably is challenging for beginner traders as there is a great deal of skills and knowledge required to become a successful trader. And in trading success means being able to consistently grow your account balance and manage drawdown periods to protect your capital.

Most forex traders are actively involved in the management of their own accounts. And those who do not have enough experience, time and knowledge to trade, open managed forex trading accounts. Professionals trade on the investors behalf and they split the profits based on predetermined ratios.

Things you should know about managed accounts

• Most forex and securities brokers enable investors to open managed accounts through trading platforms.
• Managed forex accounts are overseen by industry professionals with decades of experience and top of the line trading software. However, some investors entrust their funds to novice traders.
• Managed forex accounts offer the exposure to the foreign exchange market without the need for trading knowledge or experience
• Managers charge performance fees based on the returns generated during a specific time period

Core features of a managed forex account

Managed accounts are a great way for individuals and businesses to deploy their capital to generate passive income. These accounts are run by professionals with different strategies based on the client’s needs. Some investors may have a bigger appetite for risk and choose a strategy with higher potential returns, which comes at the cost of risk. In investing, risks are correlated with rewards. Higher the risks, higher the potential rewards. Understanding what to expect from a managed forex account can help clients determine whether this is the right course of action for their financial objectives or not.

Management

The key difference between managed forex accounts and trading on your own lies in management. Individual traders have the freedom to plan their trades and stick with the assets they are best informed about. Managers of the accounts however, do not require consent about the trades they make, as long as they deliver the desired results. Managers have complete autonomy on the pairs they choose to trade and the frequency of these trades. The account holder can choose their trading package and wait for the delivery of the results. The management of these accounts is made up of industry professionals with various analytical tools and strategies at their disposal to ensure positive results.

Fees

Brokers charge performance fees for managed accounts. Due to the volatile nature of forex markets, these fees are quite high and can even exceed 20% of the income generated by the account managers.

Often account managers ask fixed managerial fees fully in advance or month by month and smaller stake from profits generated by them. This makes very good sense, as traders should not be thinking about making a lot of money. Instead, any manager should be focused on executing the trading strategies the right way. When you trade the right way, money follows.

Strategy

There are various strategies developed by traders. Some of them are riskier than others. Depending on their risk appetite, investors choose their account managers. Keep in mind that each trader is unique. In order for the strategies to work, they need to fit the personality of a given trader.

Some traders choose to intraday, while others swing trade. There are strategies for high frequency trading, position trading, scalping, algorithmic trading, etc. When choosing an account manager, it’s important to pick the one that is in line with your goals.

Safety

When choosing an account manager, it’s important to make sure that your funds are in safe hands. The account manager should have a proven track record of consistent profits. The most important factor to take into account is drawdown periods. Drawdowns happen to every trader, the key to success is how they are managed. When you start analyzing a trader’s performance, drawdowns will give you a good understanding of risks.

Make sure that the account is open using your name and that you are an investor. Brokers offer trading accounts that differentiate investors from account managers. As an investor, it’s important to have full access to your funds. The account will be able to trade, but won’t be able to transfer the funds from your account.

In addition, you should always prepare for the worst and expect the best. What happens if your account balance decreases by 5%, by 10%?

Convenience

Active trading can be a stressful experience with countless hours devoted to market research. For those who do not have the time to actively oversee the allocation of their funds, managed accounts can be the best course of action.

Once the account has been verified and fully funded, account managers take over and conduct day-to-day trading without the need for any input from the account holder.

Managers take full responsibility for the performance of the account and will modify the trading strategy whenever necessary. Market conditions are ever-changing and requesting input from the holder at every major event would unnecessarily complicate the trading process. For this reason, managers have full discretion to act in the best interest of the client and deliver adequate returns on the initial investment.

Managed account vs independent trading

There are a lot of obvious differences between trading on your own and depositing funds into a managed account. To fully understand the difference between the two and decide which is most beneficial for you, it is important to have a clearly defined set of objectives. The average expected annual yield from your account, the fees and duration of trading are all factors that should not be overlooked.

Risk & Reward

The most obvious difference between individual trading and opening a managed account is the risks and rewards associated with each.

When trading on your own, you have more freedom to choose the trading instruments, trading strategies, and risks and rewards per trade. If you lack the knowledge and experience, it will be riskier for you to trade. On the other hand, trading live can give you an experience required for future success. You do not grow as a trader when other people are managing your money.

Account managers need to perform much better than you would in order to justify hiring them. Account managers are charging a lot of money from investors. On the other hand, managers take all the trading responsibilities and do the hard work.

Research

It’s important to do your research before entrusting your funds to an account manager. Many managers keep the amount of money that they manage and their trading history hidden. They only share returns in terms of percentages. Which is not a good indication of how good a manager is.

It’s a lot harder to manage 100,000 USD than it is to manage 1,000 USD. The greater amount makes decision making more difficult psychologically. As the number of risks increases per trade even knowing the risk percentage might be the same. Before entrusting your funds, make sure that the account manager has experience working with large amounts of money.

Beware of fake reviews and fake recommendations. Your account manager should be using a regulated broker.

When it comes to market research, account managers take all the hard work on themselves. Research takes considerably more time and effort than entering and exiting trades.

Cost

Individual trading is often subject to commission charges. While these charges are typically low, they are nonetheless important, especially for traders that have a limited budget and trade with low amounts. Brokers usually charge traders with spreads and commissions. In addition, there can be money transfer fees, administrative fees and inactivity fees.

Managed accounts charge performance fees which can vary between 20-30% depending on the account manager. In addition, some managed accounts have minimum initial deposit requirements, which can make them inaccessible for many investors.

Managerial duties & account performance

For money managers, these accounts provide structure and a clear trading strategy that the holder finds appropriate. Money managers have sets of guidelines to follow and know which pairs to trade and at what frequencies to achieve desired results. Some account tiers that deal with high-risk pairs give managers more flexibility and independence in timing the trades.

Aside from the usual base salary, money managers can receive bonus checks depending on the account performance. Underperformance, however, can be a serious issue for money managers and can tank their reputation. Substantial underperformance could also lead to legal trouble, if the account holder suspects foul play and disregard for their best interest by the money managers. Often investors and traders themselves set limitations upon trading to keep accounts from sharp drawdowns. For instance, an account manager might have 2% of maximum drawdown per day. If the losses reach that 2% of the account balance, the trader stops trading activity and resumes the next day. This keeps traders from overtrading and emotional trading.

Main takeaways from managed forex accounts

• Traders can choose to trade independently or use forex accounts managed by account managers.
• Managed accounts do not require day-to-day input from account holders. Managers take all the responsibility in this regard.
• Managed accounts charge performance fees and have minimum balance requirements
• Account managers are using various trading strategies and some of them are riskier than others. Investors choose account managers based on their risk appetite.
• Managed accounts are not risk-free and investors might lose money even if the managers were successful in the past. Past performance doesn’t guarantee future success. However, it’s the best indication we have available.
• It’s important to do your research before choosing an account manager. Make sure that the manager can manage drawdown periods, is reliable and has experience with managing a lot of money.

FAQs on managed forex accounts

What are managed accounts in forex?

Managed accounts are accounts overseen by professional traders who conduct trading activity on behalf of the account holder. Managers of these accounts charge performance fees that can range from 10% to 50% of the profits generated by the account. Some managers charge fixed fees and smaller performance fees.

Are managed forex accounts safe?

Most forex brokers are regulated in multiple jurisdictions and have to comply with KYC and AML protocol. When opening a managed account with a regulated Forex broker, it is considered safe. However, make sure that the account is opened using your name as an investor and you have full access to your money. An account manager will have the access as a trader but will not be able to transfer funds. Make sure that the manager has the experience and is reliable.

Who will manage my forex account?

Managed accounts are run by professional traders with years of experience and various sophisticated tools at their disposal to analyze market trends and technical indicators. Account managers have clearly defined trading strategies at hand to ensure sufficient returns.

Are managed forex accounts expensive?

Forex brokers charge trading fees. And on top of that, account managers charge investors with fixed fees and performance fees. Managed accounts can be expensive for many investors depending on how much the managers ask. In general, managers ask 10-20% from profits. However, there are many cases when account managers ask for a 50% cut from profits.