Managed Trading Accounts: Are the Bots or Investors in Charge?

Managed Forex Accounts – Who is in Charge of your Money?

Many people are looking to put their savings to work rather than having that money sit in a bank account where it earns almost no interest.  And while there are some risks involved with market investments, there are conservative strategies available that can allow you to keep your money relatively safe and building gains over time.  But should you research and conduct these investments yourself, or hand your money over to a regulated professional managed account?  In order to answer this question, it makes sense to have an understanding of how managed accounts work, because there are many instances where the trading decisions in these accounts are not even made by human beings. 

Forex Markets

Here, we will focus on the Forex markets, as it in an area that is rapidly rising in popularity.  Investors managing forex accounts will usually look to profit from longer-term moves that are likely unfold, although there are also many instances where shorter term day trades will be placed as well.  Shorter term positions tend to be a smaller percentage of the overall portfolio, however, as this helps to remove some of the potential volatility in client account sizes.  Forex markets also tend to trend more than other types of markets (such as stocks or commodities), and this is more conducive to positions in currencies.  From a personal perspective, this tends to be best suited for those with more conservative rather than aggressive investment goals.

Fundamental Analysis

Longer term trades, however, generally need to be based on fundamental analysis.  This is because a successful position will need the support of underlying economics in order to produce consistent gains.  Of course, there is no way for computers to conduct fundamental analysis because there is no way for a computer to put macroeconomic results in the context of other market news events.  There is simply too much “human” information for a computer to process.   So, in order for fundamentally-based managed accounts to consistently generate gains for account holders, money managers need to have accurate forecasts for how specific currencies will perform over the life of the investment.  If you are reading the promotional material for a Forex managed account and you are seeing many references to economic data (such as GDP, inflation, jobs numbers, the unemployment rate) then there is a good chance that most of your money is being put into trades designed by a manager. 

Technical Analysis and EA (Bot) Systems

But not all managed accounts work this way.  Some strategies are based exclusively on chart analysis — and some of those accounts used automated trading applications called Expert Advisors (also known as EAs or Trading Bots).  Technical analysis largely dismisses market fundamentals and focuses entirely on price activity itself.  This reluctance to use economic data as a basis for trading decisions makes many investors skittish.  But some managed accounts take this even farther and use computer programs to open and close their positions.  Trading Bots also rely on technical analysis (exclusively, because computers are not capable of conducting fundamental analysis).  These applications set filters for market price activity and trades are automatically opened and closed once certain criteria are met.  So, for example, if the EUR/USD rises above its 20-day moving average, the EA might enact a bullish position for the currency pair.

Who is in Charge?  How Much Does it Matter?

Given these general scenarios, it makes sense to ask questions before sending your money to a firm the runs a managed forex account.  What types of strategies will be implemented?  Will there be cases where your money is put at risk using automated EA trades that have very little human supervision?  These are important issues, especially for those with a lower tolerance for risk.  There have been many instances where EA trading has led to major losses at managed accounts — especially during times of increased market volatility.  A majority of investors find it important to have at least some oversight when their savings is put at risk through investments.  If you fall into this category, it makes sense to avoid any managed account that relies on EAs for its strategies. 

On the positive side, there are many Trading Bots that have been historically back-tested and have proven successful over time.  But at the same time, you will probably asking yourself an important question:  If a trading robot is making all of my investment positions, why would I want to pay the fees associated with managed forex accounts?  If you are interested in automated trading based on EA trading signals, there are plenty of free and paid applications that you can found on the internet.  It makes sense to test these with a demo account first, however.  In any case, those looking for a managed forex account should not blindly follow the strategies likely to be implemented by the fund manager.  Not all trading scenarios are right for all people.  Those with less tolerance for risk will want to make sure a live human is running their account as protection against surprise market volatility