Studying how to read charts, learning about position sizing, practicing your strategy for hundreds of hours, and preparing yourself mentally to the risk you are about to expose your hard earned money to. What if all that hard work was delegated to someone else? A managed forex account might be what you need, but wait, what’s the catch?
The first thing you’re asking yourself is probably “Can I really trust someone to trade on my behalf and to actually do it well, as if it was their own money?” or “Why would they need my money if they can actually profit from trading?” First of all, yes, you can find someone competent to trade for you. But be sure to pay attention to these 4 points first, they will save you from a lot of headache in the future.
1. Protecting Your Money
Your primary concern should definitely be the safety of your capital. Keep in mind that the worst thing that could happen is losing the entirety of the money you invest, which you should work towards preventing. This is why you should exercise due diligence as much as you possibly can and run far away whenever something suspicious comes up.
a) Verifying the Fund Manager
The first step to take would be to verify that the manager has a valid permit that allows them or their company to manage other people’s money. In the US, the most common registration is with the SEC (short for Securities and Exchange Commission). If they have no official paperwork that shows that they are qualified enough to be entrusted with your money, I’d look the other way and find other alternatives.
b) Get the feel
Secondly, it can be very informative to read between the lines. Does the person you are talking to sound professional? Are they providing you a credible source for their track record? Are they promising you unrealistic returns? Keep in mind that confidence is a must in a trader but there’s a limit to how confident they should be. If they are discarding the possibility of a drawdown in your capital, you should doubt their competence.
c) Start Small
Thirdly, you don’t have to entrust them with your entire savings from the get-go. If you were planning on having them manage $10K of your money, why wouldn’t you begin with, say, $2000 and observe the results for a few months? Another option would be to simply open an account with the minimum deposit that they allow. Taking things slow could save you a lot of money.
d) Second guess everything
The above should not be ignored, even if someone close to you personally vouches for the manager. Imagine if a family member came up to you and told you about a genius trading on their forex account and making them a return of 5% every week. It also happens that this person is looking for more clients. What a great opportunity, right?
Even though your family member is probably not lying about the returns, there have been many cases of fraudulent managers who used their own money (or any money they could put their hands on) to pay off fake profits to their investors. They do so to lure more investors and to create a viral effect of people referring them. When they feel like enough money has been accumulated, they run off and are nowhere to be found, until they get caught by the authorities (which does not always happen). Even if they are caught, it can be a hassle to get your money back. That is why being doubtful can save you time, money and stress.
2. Having Reasonable Expectations
As far as expectations go, it is important to keep in mind that the higher the returns are, the bigger the drawdowns can be. In the end, making a lot of money is mostly a matter of how much of your capital you are willing to risk, and fund managers are not exempt from that principle. If you are investing your money in a managed forex account with the expectation of making 100% return within the first few months, you should also be prepared to lose the bigger part of your account.
If I had to put a concrete number on what slow and steady should look like, I would say that something along the lines of 2% capital growth per month is reasonable. When you are told the possible return on your investment, you should think to yourself: “Yeah, I can imagine someone maintaining that kind of growth”.
Instead of thinking of your managed forex account as a get rich quick thing, you should view it more as a diversification option to your investment portfolio.
3. Concern: Can’t They Just Trade Their Own Money?
Simple question which can be answered with a simple answer: they want to make more money.
As a fund manager, the most effective way to increase your income is to recruit more investors and to grow the total amount of capital you can trade with. Remember that their personal profits are proportional to the amount of money they manage.
4. Big or small firms?
Do I recommend joining a large and already well-established fund? It is, in most cases, safer to do so. A management firm with years of good results is definitely easier to trust. It is possible that you will not receive the same kind of customer support as you would with a more recently funded organization, though. If you join a fund worth billions of dollars where certain clients are investing millions, it is obvious that your couple thousand dollars won’t be enough to earn you VIP status.
On the other hand, a newly created firm will be willing to dedicate more resources to solve any problem that should arise since it is in their best interest to establish a good relationship with their customers; they are hoping that you will recommend their services to your entourage.
In a managed forex account, you put your money in the manager hand with no quick hard stop option. This mean that regardless of what the agreement say, he has power over your money which you can’t just revoke in a snap of fingers.
On the other hand, utilizing copytrade can give you similar benefit without the hassle nor the commitment. Once you subscribed, if at any given point you do not like what you see, you can get out in a push of a button, literally in a snap of fingers.
Final words on managed forex account
Whichever manager you think is competent enough to be entrusted with your hard earned money, keep in mind that all the time put into verifying their credentials will pay off in the long run. You might wake up one morning seeing, on the television, that one of the people who promised you amazing returns, which you refused, just ran off to the Bahamas with a couple million dollars of investor funds. You might feel infuriated that someone would do that kind of thing but hey, at least it’s not your money.