ABOUT THE AUTHOR: Ismar Zembo is a trader and IB for Sensus Capital Market.
How to stay in control of your managed forex account
Enough is enough. I just finished a meeting with a friend of mine who gave 500,000 euros on a managed account to a registered broker, who blew 90% of the account in only 30 days – they entered a trade and boom…money is gone.
As a result I asked the following questions:
1. Did you check the trader’s strategy with historical results?
The answer was NO.
2. Have you made a hard stop-loss agreement with your broker to be sure the money manager can’t go over his margin?
Again, the answer was NO.
3. Finally, do you know what his maximum drawdown was?
As expected, the answer was again NO.
And yet, how many times does a situation like this occur? I’m sure that anyone who is
investing in an forex managed account invariably has experienced something like this.Broken dreams, broken promises, a client lost from an IB, clients lost from money managers, clients lost from brokers and yet another investment relationship is over for life.
Talk is cheap
People are investing based on sales talk and have trust in somebody who does not have any knowledge in evaluating risk-reward ratios. It is critical to know when you invest in any kind of investment, especially in forex market.
On the other hand, there are many people and companies whose marketing results are not real, and that is easy to prove if you have knowledge. Presently, market participants can employ a tool that can import data from MT4 account statements and show you all statistics that you need to know, which is great as this service is free of charge, granting a wide array of knowledge.
Implement a hard stop-loss
In my experience, if you ever lose a client, you lose a relationship for life. So before you invest in managed accounts be sure that you have defined a hard stop-loss with your trader and broker. Many brokers today have a stop-loss level protection, and if they don’t have it they can implement it for you. It is critical to define what is your worst-case scenario.
Communication is the key
Taking the time to communicate effectively worst-case scenarios with your investors, or with yourself, can save relationships with your clients and will save you money.
For example, if you have an investment that cannot touch more than 30% of a drawdown, you must make sure to set up a trading strategy that will fit that risk level. Because even if you have a great strategy that is running on the account in an inappropriate way, you can blow your investor’s account.
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In daily life that is akin to driving over 180 km/h when you are allowed to drive no more then 120 km/h. It doesn’t matter if you arrive a few hours before a “slower driver,” what matters are relationships with your clients and the emotional payoff of having your appropriate risk control. Because every trading strategy will have a bad day, it is just a question of how you handle it.
Know the maximum drawdown
Moreover, be sure to know maximum drawdown and not just monthly profit. People usually look just at how much they gained or how profitable they are on monthly or yearly basis. Myfxbook.com is a wonderful tool for calculating results and risk, but one of the things that is overlooked there is negative floating. For example, I can have an account that made 20% profit in three months, but that now has 20% of negative floating; My monthly result will be calculated positively with balance that is closed but not on real equity. In this case I will get an unrealistic idea about my return.
Lets take a look at this in two strategies
In reality, we see here monthly profit of 16.12% and drawdown of 58.55%, but it is calculated using unreal profits because what we have is equity, and if we withdraw all funds we would have 186% or 246% which are non-existent. That is a huge difference in real profit.
Even on this profit 186% is unrealistic, because if you invested 100,000 euros, your equity would be 220,000 euros. Thus, it is something like 110% of equity growth.
That is real, because if you make a withdrawal today and close all your positions you will have your equity and not balance. Then, if we want to be honest, we have to admit that we doubled our account in value with 58% of a drawdown in one moment.
Lets take a look at another example
Here we have also done a great job: In just over six months our account doubled in value. But in this case, maximum drawdown is 17 % and our equity curve is the same as our balance almost all the time, so we do have a real value in our account.
First account: Second account:
Drawdown: 58.55 % Drawdown: 17.01 %
Result after 9 months: 120 % Result after 7 months: 94 %
To recap, the first strategy risked 58% to double the account, while the second strategy risked 17% to make 94%.
Which means that if we take the second strategy and double the risk, we would still have a lower drawdown but much better results.
As we see here, if we do pay attention to this ratio, we can get more for our euros that are at risk.
Also one big red flag to pay attention to is receiving forex managed account offers from the companies that make fake statements. Last week I received one such offer that seemed to me like a very good risk/reward trading strategy.
Then after I have checked with the broker that they work with, I realized that they had a trading history even before the broker was operational. I still don’t know how they managed to do so but it seams that everything is possible. So if you don’t know your money manager and you have doubts, please contact the broker that your money manager has an account with to verify that the account is real.
We see here from this example that we need to be very cautious and skillful in managing risk to avoid potential problems with investment accounts.
Five rules that will keep you on track
1. Always reflect and discuss with your investor the maximum drawdown that your account can tolerate
2. Arrange a hard stop-loss agreement with your broker to verify that the money management is set accordingly
3. Evaluate the trading strategy of the trader, not just with myfxbook.com, but also taking the time to go through the history from MT4 or some other statement
4. If you don’t know the trader personally ask the CEO of the broker to confirm that the account is real and on the market
5. Set up real expectations so you aren’t disappointed when not reaching targets