In the foreign exchange (Forex) Market, the ability to trade either proprietary capital for one’s own account or funds belonging to clients (non-proprietary capital) is known as managing forex funds or fx asset management, and those who manage such funds are typically called Forex Money Managers, or also known as Forex trading advisors or Forex fund managers.
These persons or company’s that engage in operating forex funds are trading professionally, and therefore may often be sought by investors and traders who wish to invest in foreign exchange markets, whether to diversify their portfolio or complement their own trading.
The essence of being a Forex Money Manager whether for your own account (prop-trader) and/ or while managing clients’ funds share the common goal of generating growth and appreciation of capital on the original investment principal.
Common Destination Yet Many Roads Try To Find the Path to Profitability
This main goal of making money on invested capital is irrespective of time frame or trading frequency, as in the end everyone wants to make money – however – trading involves risk, and over time the end result for each investor or forex money manager can vary – and often does considerably.
While the forex market provides ample opportunity to generate profits, there is no short-cut to making money, and as the famous adage goes “money doesn’t grow on trees,” and so in forex doing the right research can help increase your chances in succeeding whether trading for your own account or when investing with a forex money manager.
It is therefore not enough to just want to make money, the exact level of return relative to risk taken needs to be considered along with the overall forex trading system being employed by the forex money manager.
Explanation of What are Forex Money Managers
As described above, forex money managers share the goal of making money either on their own capital and/or on capital belonging to investors, however the approach that a manager will use, along with the brokerage that will provide the trading software and hold investor capital, will determine the quality of the offering and directly affect the net results of the manager.
Therefore, just like any investment, the success of working with a forex money manager will depend on the ability to source and compare ideal candidates while conducting investor due diligence, as will be referenced below.
The reasons to invest in a forex fund can be many, from diversifying an overall investment portfolio, to diversifying a forex portfolio, such as complementing your own trading accounts, and splitting funds between trading programs, as well as having exposure to trading when you aren’t able to trade yourself, or exposure in instruments that you aren’t familiar with.
Measuring results of Forex Money Managers
The ability to measure the performance of Forex money managers is an important method for understanding historical trading results and how meaningful they are with regards to risk versus reward and other performance rankings that measure the frequency, duration and size of losses relative to profits and aims to provide score that investors can use to make sense of the results.
This score could be anything from a simple percentage return, whether annualized, monthly, an average or geometric average return, on the overall account balance, initial investment, or nominal trade volume traded from within a margin account balance.
Forex Blog recommends WorldWideMarkets as an ideal brokerage for both investors looking to trade with Forex Money Managers, as well as for Forex money managers themselves who are looking to trade on behalf of their investor clients. The company provides services for forex trading advisors, as part of its institutional services offering, which includes support for Forex IB Business and as discussed in a related post on forexblog.com.
High Returns Don’t Always Correlate to Good Trading Strategies
It is paramount to remember that the highest rate of return doesn’t always correspond to the best forex money manager or program where you should allocate capital. Traders who always chase high returns may be taking on too much risk which can lead to substantial losses. Without measuring other risk-related performance measures, it would be nearly impossible to determine if the results were just pure luck, reckless trading, aggressive trading, conservative trading, or almost anything in-between. Therefore, the overall net-gains advertised in any track record should be viewed with a healthy amount of skepticism, before ascertaining the whole picture as will be compared in this article.
More sophisticated measures commonly used to gauge the often-hidden levels of risk in the trading history of a strategy may include the Sharpe ratio, Burke ratio, Sterling ratio, Sortino Ratio, and other measures of risk versus reward over time. Other ratios that track the underlying instrument or benchmark, such as the information ratio which aims to measure any tracking error between trading performance and the performance of an index, for example, can also be used while analyzing historical returns.
Don’t get lost in the numbers; the Essence is what matters
There are literally hundreds of potential ways to measure such relationships while analyzing performance, but the key point is to be able to discern the essence of trading results, as part of comparing Forex money managers, and while conducting due diligence.
Paradoxically, while past performance is not always indicative of future results, it can still be revealing of other material information as part of researching a forex fund on the quantitative side (looking at the numbers).
Reviewing historical returns can also also help when combined with investigating any qualitative aspects of who the forex money manager is and more about their company and background, as the whole picture should be sought when choosing where to allocate investor or proprietary capital.
Trading Methodology: It’s All About the Approach
The success of a Forex money manager relies on using a trading strategy that will provide good enough odds to have a higher average profit per trade relative to the average loss per trade, over a given time period that the strategy is used to open and close forex positions in the market.
With favorable risk-management applied in addition to ideal profit targets, good odds for a given strategy provides flexibility so that the size of losses are controlled and are smaller than the size of profits, in order to return a net-profit.
Even if the profit targets aren’t reached the losses are within an expected range, and subsequent trading will allow a good chance to regain profits, provided that ideal trading opportunities are found, and the strategy is followed.
Determining Odds and Expected Performance of a Trading System
For example, a trading system that never uses more than 1% of investors capital as margin to open positions, will obtain at most 100:1 leverage or 1% margin requirement, where a $100,000 account balance could provide $1000 (or 1% of $100,000) in margin to open 100 times that amount ($1000*100), which4 means that the forex money manager could buy 100,000 units of currency, while only using $1000 as collateral from the investors balance, thus leaving the remaining $99,000 as available risk capital within the account.
If for example the forex money manager bought 100,000 units of USD/JPY, at a price of 104.50 Yen for each US Dollar, and as part of the strategy applied a stop-loss order of 50 pips which would be worth roughly $500, and a target of $750 for the limit to take profit, if the strategy included doing only one such trades per day, than the max risk per day would be $500, and max profit would be $750, and only using $1,000 of the investors balance as margin.
In this example, if the trader was right half of the time, for example out of 10 trading days, if 5 days had each profits of $750 (5*$750=$3750) an the other 5 days had losses of $500 respectively (5*$500=$2500), the net result would still be a positive net-gain of $1250($3750-$2500= $1250).
Forecasting Chances of Success
By doing the basic math for a specific strategy, knowing how much margin will be used, for the given trade sizes, and expected risk reward ratios (of the stop-loss relative to the limit level), including the frequency of trades, max number of trades permitted at a time, or per day, we can forecast the odds.
The odds in the above case, requires that the trader is right at least 50 percent of the time in order to at least break even. Whereas, if the odds were less favorable, it would give the trader less room for error, and require a higher winning percentage rate, and thus make it easier to lose money, even if just a few trades have their risk-threshold met.
Therefore, understanding the strategy, including the risk-reward ratios used, and the resulting odds based on the expected trading style, can be one way for investors to get an idea of how it would be to participate in various forex funds, and while comparing performance against other trading strategies or Forex Money Managers.