The 27-year-old actress, whose involuntary psychiatric hold was extended by 30 days on Friday, after her mother Lynn Bynes was granted a temporary conservatorship over her, is doing much better in recent days and doctors believe she will learn to manage her mental illness.
A source told FOX411 on Monday: "Amanda has made significant improvements, she is doing better than she was.
"There are no drug problems involved, it's all mental. She has deep anger and PTSD (Post Traumatic Stress Disorder), which tripped a psychotic episode... She is very ill, but manageable. Amanda genuinely wants to get better and has wanted to get better for some time."
The 'Easy A' star's PTSD allegedly stems from the pressure she has felt since carving out a successful career in Hollywood as a child star on Nickelodeon.
She also has issues with her parents, Lynn and Rick, and is not particularly close to either of them, according to the insider.
Amanda is not expected to remain under a conservatorship for a long period of time, unlike Britney Spears, and it is simply being viewed as a "safety valve" to help her get back on track.
The source added: "Amanda can't make important decisions regarding her finances and welfare. But her parents can't either. Everything still needs to go through Amanda's lawyer and the judge.
"She is easy to deal with at the moment and agreed to stay (in hospital). While she is doing much better, Amanda needs to be monitored. She is on heavy anti-psychotic drugs and that requires constant medical observation. She wasn't able to attend the hearing on Friday because at this point in treatment, she should not be moved."
Amanda was taken to the Hillman Psychiatric Center in Ventura County, California, on July 22 after being arrested for starting a small fire outside a stranger's home in Los Angeles.
Her mother is now eager to move her to a more private facility.
A source told RadarOnline.com: "It could happen as soon as this week. She will get better care at a private facility."