Managed Forex

The Review lists a select group of exceptional managed forex accounts. Unlike mutual funds, these accounts are private and under the control of the account holder. As such are not equivalent to listed assets such as stocks or mutual funds. Since the account is held in the owner’s name, it is essentially the same as any depository account. Funds can be added and withdrawn. However they can also be exchanged for other currencies so as to take advantage of price differences over time. The managed account owner can make these trades, or have a professional manager make them via a limited power of attorney.

The Managed Forex Provider

Managed Forex providers are independent, but regulated traders who have developed techniques and styles for trading currencies. Each manager will invoke a particular combination of methods, currency pairs, and risk management rules in order to earn profits in the account. Some providers will concentrate on technical analysis, some will trade the news, others will focus on the larger fundamentals of a currency, taking into account a nation’s economic metrics, politics, and monetary policies. Most traders will take all of these variables into account as they trade. No single method is necessarily the best, although by reading marketing materials you’ll find plenty of promoters assuring you that their system is superior to all others.

Managed Forex via Autotrading

A hybrid managed forex approach involves the use of EA’s or “trading robots” in conjunction with human oversight. Managers may use these robots to enter trades, while the exits are made manually. Some managers depend wholly on automated trading. In our opinion a good managed account can employ trading robots BUT must also full-time oversight by an experienced trader. This is because “mechanical” systems (like any computer program) are so complex that they will inevitably fail, if but for a moment. Thus the trader must oversee the system and take action if it presents issues in its performance.

Managed Forex as a Means to Regular Income

No serious account manager will suggest that you can earn a high monthly income on a relatively small account balance. Every managed forex provider will have losing trades and losing months. To suggest that one can “earn a living” on a $10,000 investment is irresponsible. Yes, there may be months when the account earns $4,000 in one month, but there is also the possibility that the account could lose as much (if the account manager has a setback).

So unless your portfolio is in the high six digits, you should not expect to withdraw money on a regular basis from your account. You can try, but we don’t recommend it. Our most successful clients leave their money in the account through thick and thin, knowing that over the long term, the account is likely to grow.

CTA Managed Forex Accounts

All proper Manged Forex Accounts will have a number of qualities in common, regardless of the manager.

The Manager must use a reputable Forex broker (although many managers use multiple brokers, which is fine). We have seen unregulated brokers fall apart and take their client’s money with them. This has happened in the past, with the famous Refco case, and is currently happening with another broker located in Panama.

You should only invest in a managed forex account if it is traded by a CTA (in the US). For managers located in Western Europe, they should also be regulated, by the FSA or by other regulatory bodies. NEVER invest in a managed account unless you’re dealing with a registered, licensed manager. Why?

If a Managed Forex Account is associated with a registered broker, it means that the account manager has successfully passed through registration procedures and due diligence. Before giving approval to an account manager, the broker must check the identity of the actual managers, the jurisdictional details, and the physical address of their company.

Risk Management

Look for good risk management. This requires discipline, constantly, in every market, every day. It’s not possible to eliminate all risks, but minimizing the risk taken per trade is a good trader’s mantra. Only a small amount of money should be used for each trade. This allows for losses to occur (and they will).

Losses must be stopped out, not held “in the background” indefinitely. This kind of practice will wipe out a managed forex account even if the method has a fancy name!

Deposits to Managed Forex Accounts

Your deposit is made DIRECTLY to the broker (not to the money management company’s account). You never send the money to the trader unless the trader is also a “Fund Manager” (an entirely different species of investment). Only you can withdraw your money from your account. The manager can instruct the broker to make trades with your money, but he cannot withdraw a single cent or penny from it.

Withdrawals from Managed Forex Accounts

Naturally you want to know that you’ll have access to your money when you want it. When you have a managed forex account, you must be advised, before you invest, of your particular broker’s policies. The process may vary depending on the specific type of account you’ve opened. Some types only allow withdrawals at certain times and hours. Others will allow withdrawals at any time. In all cases, withdrawals must be sent in the name of the original account holder. You can’t “transfer” money from your account to someone else. This policy stems in part from the Patriot act, and in part from basic security protocols: you don’t want to put money into an institution which will allow someone else to withdraw your money! Managed Forex Accounts require strict rules. These are established and enforced for your safety.

With all Managed Forex Accounts, the investor is the one and only person authorized to make withdrawals. This legal structure ensures maximum security for the investor. Every broker has different rules. Ask questions before you invest, both with your broker, and your manager. This way you will not only understand how your managed forex account is set up, but how you can do well with it over the long term.

Managed Forex Accounting

When reviewing returns on managed forex accounts, there are a number of “metrics” to carefully examine, and consider. We’ve noticed in general that forex providers emphasize pips.

To be blunt, pips alone don’t mean anything. A pip count won’t tell you the return on investment, or what the draw downs have been, or how much capital is required to earn those pips.

Pip data is useful in other ways. It helps to know the average pips earned per trade. If you see a managed forex account that only averages 2 pips per trade, this is not a comforting statistic.

Proper reporting for managed forex accounts involves standardized reports, sometimes called capsules, sometimes called D-Docs (for Disclosure Docs). These documents will provide you with monthly returns on investment, maximum draw downs, and additional measurements such as the number of negative days, or trades, the profit factor, sharpe ratios, and standard deviations.

One misconception regarding managed forex accounts is that there is a “master account statement” which will quickly and easily inform the reader of the account performance. Brokers do issue statements for managed forex accounts, but often these will include multiple capital additions and withdrawals. Since the Assets Under Management (AUM) can change from day to day due to these additions and withdrawals, one must consider these varying account balances when calculating the Return on Investment.

Assets Under Management

Managed forex professional will usually disclose their total AUM (assets under management). This figure might include ALL accounts under the manager’s name, or only the account you are reviewing. Usually the AUM is specific to the account you’re reviewing. But you should always ask. If the manager won’t give you this information, you might want to ask why. If you’re not satisfied with the answer, then there are always other manage forex accounts to consider.

Manage Forex Trading Styles

Every trader is unique, and has developed an approach to trading which, if successful, helps the trader earn a favorable reputation and his investors favorable returns. When you invest in managed forex, remember that your trader’s main job is to make money for you.

Some will enter trades which remain open for days, weeks, or months. These kinds of trades tend to rise and fall, often dramatically. As such, you may be tempted to second-guess the trader’s competency. This kind of questioning and judgment should only be done from a long-term view, rather than from any single trade’s entry and exit points.

Some traders “scalp.” This technique looks for short-term profits during range-bound conditions. Scalpers will make more traders per month than trend traders. Neither is better than the other. Be aware, however, that your managed forex account may reflect both styles of trading.

When you open a manged forex account, one approach we recommend is to “take the temperature” often during the first week or two, then taper off as you become comfortable with your investment.

Some managed accounts, including one which we list in our review section, have returned well over 1,000% per year. If you are attracted to this type of account you should only invest if you’re prepared to lose your money. It is mathematically impossible to achieve this level of return without the use of high leverage. The high leverage means that during any point you could see draw downs of 50% or more. Once draw downs reach a certain point, you’ll get a “margin call” or “liquidation” which means that your positions will be closed and your managed forex account will be reduced to a fraction of its original amount.

Managed Forex vs Autotrading

There are several “close” relatives to managed forex accounts. These include “auto-trade” systems such as those offered by Zulutrade, Collective2, Currensee, and Tradency. The common feature of all of these systems is a selection of hundreds of trading “systems” which you, the investor, can choose from.

The concept on its surface looks good. You can “mix and match” systems to create your own portfolio. However, in our experience, most investors in these systems discover that the pretty graphs on the websites bear little resemblance to the performance in their live accounts.

Why is this? The most fundamental reason is that there are dozens, or hundreds of “settings” which may differ between your account and the “model” account you see online. These can include stop losses, maximum number of positions per system, or per pair, or for your total account. They might include differences between brokerage hours, commissions, lot sizing, and trade execution. In at least two of the systems mentioned above, we’ve discovered in our analysis that the statistics and data provided by the sponsor are simply wrong. For example, a system may advertise that it opens a maximum of 4 positions at once, whereas an independent analysis shows that it has had 10 or 15 open positions. This misrepresentation can frankly blow out an account.

Other misleading (to be kind) practices may involve the omission of draw down data. We’ve seen systems that advertise returns of 200%. However when we replicate the trades on our analysis software, we discover that the draw downs exceed 100%. That means account blowout again.

Does this mean that these “auto-trade” systems should be avoided altogether? No. It means that you must make absolutely certain that you get the whole picture before investing.

Managed Forex accounts, on the other hand, will provide you with all of the information you need, and more. When you examine a managed forex account, you can ask for draw down or risk exposure data. In addition, by their very nature, managed forex accounts take care of the uncertainties regarding leverage and appropriate investment amounts for your account size. Additionally, a managed forex account involves a human being who either makes the trades, or manages any software which executes them. Oftentimes, in managed forex accounts, the manager will use auto-trading software to assist in the timing of trade entries and exits.

All in all, a managed forex account is infinitely more preferable than hooking up to an autotrading system with its many moving parts!