In order to carry out forex trading, one needs to open a forex account with a registered broker or bank. Forex trading service providers come under the Commodity Futures Trading Corporation and should be registered under the Futures Commission Merchant. Brokers normally offer two or more types of forex accounts for trading. A mini account gives a higher amount of leverage with a minimum small cash deposit. However, it is normally associated with a minimum level of trade. It is suitable for people who want to invest a small amount of initial capital.
A standard account, on the other hand, requires a higher level of initial capital, say about $2000, but allows one to trade with different leverages. Premium accounts require the highest capital and provide different facilities and services, along with a variety of different leverages.
Many individual investors invest in the forex market as an additional source of income or a different mode of investment. They have full time jobs / obligations and do not have the time to learn the workings of a new market. However, they have the money to invest, and are drawn by the liquidity, 24 hour trading and high returns provided by forex trading. To tap this market, many institutions offer what is called ‘managed forex accounts’.
This means that the investor contributes the investable funds, and the experts of the managed account take enter/exit and other trading decisions. The investor has the benefit of expert decisions, saves time and is not necessarily involved with the daily trading choices, but a reasonable rate of return. Also, the money manager can make money both in rising as well as falling markets, which gives the flexibility to earn profits on behalf of the investor. For this, the managed forex account provider charges either a monthly fee irrespective of profits, or 10-40% of the annual or monthly profit made by the investor. The monthly rates of return range between 5-20%, according to the advertisements of institutions offering the service.
There are mainly two types of managed forex accounts, manual trading ones and automated ones. In the automated ‘bots’, a coder builds a system software incorporating the money management rules into the programming of the software. Some even allow the investor to set certain limits. Such software sometimes gives a steady return compared to manual factors. However, the more traditional investors prefer manual operations as the human factor often gives better returns as it is able to judge on a macro aspect.
Why Some People Stay Away From Managed Forex Accounts?
The most common reason for people for staying away from managed forex accounts is that many require large investments. Most brokers or investment firms require a minimum of $10,000 to be invested in a managed account, which is quite large considering the portfolio of the average investor. Also, although the firms assure certain yields, they charge hefty sums as fees. Some take monthly charges even though there are no profits. These, accumulated over time, may offset the profits got from the investment and make it similar or less rewarding than other means of investment.
Overall, managed forex accounts are suitable for investors who prefer their money to be handled by experts with a reasonable rate of return, and want to avoid the hassle or time needed to take decisions themselves. Mostly, these help in a good distribution of the investment portfolio and are used by intelligent investors to obtain a good tradeoff between risk and returns. Provided the rates of return are at least equal to investments in similar risk groups, managed accounts enable a suitable diversification of investment portfolios.