Finance

Ralph Demsky was familiar with EG’s worrisome corporate situation and had been a vocal advocate of a sharper focus on shareholder value for EG for several years. Ralph was convinced that great opportunities existed for EG to boost its value. Upon retirement of the previous chairman and CEO, the board had tapped Ralph to lead EG because of his controversial ideas and his strong operating track record leading Consumerco.
Ralph knew he needed to act fast. His plan was first to uncover and act on any immediate restructuring opportunities within EG. Then for the longer term, he would put in place management systems and approaches to ensure EG did not pass up rich opportunities.

It is debatable whether or not momentum traders are trend-followers. There is no debate when it comes to flow-based currency speculators. The very act of using order flow information for the purpose of trading in the currency markets requires that the user is following the trend suggested by that flow data. Currency speculators who focus on flow, use that information to anticipate the continuation or end of a trend. Clearly, with flow products, both the quality and the relevance of the flow data are crucial elements in deciding whether or not to use such products as one’s primary information source for trading. There is no point in using a flow product where the order flow is neither reflective of the currency market as a whole nor has any impact on it. Flow-based currency speculators can certainly earn excess returns, but as with other trading approaches discipline is needed. Unlike in the case of the momentum trader where the model creates the signal irrespective of all other factors and therefore the trader’s only job is to execute according to that signal, there is still a significant degree of discretion and interpretation in flow-based currency speculation. For instance, temporary seasonal factors can distort flow. If the flows model were passive, this would mean that a trading signal would be triggered irrespective of this important consideration. That said, the aspect of discretion automatically increases the possibility of misinterpretation and making mistakes. As with most types of trading or currency speculation, experience counts.

Momentum funds have a different trading approach as regards currency speculation. Rather than focusing on apparent disparities between the economics and the price, they use so-called momentum models to trigger buy or sell signals in currency pairs irrespective of the economics. Granted, one could argue that since economics affects the price of the currency, so it also affects their models and therefore their trading approach. However, it is fair to say that economics is not their primary focus. Their aim is to be disciplined to the extent that they rigorously follow the trading signals of their momentum models. As one might expect, the nature of these models varies. For instance, one such momentum model relies on technical analysis indicators to provide short-term moving averages. When a 5-day moving average crosses up through the 15-day moving average they buy and when the opposite happens they sell. Granted, this is a vast oversimplification and there are many significantly more sophisticated momentum models than this. That said, the principle is surely the correct one. Momentum models, however complex and whatever indicators they rely on, focus on changes in market prices as their key determinant for providing signals rather than economic fundamentals. Therefore, it is probably a reasonable generalization to say that they are more short term in their trading approach than macro-based currency speculators might be, depending of course on how long the momentum signal lasts.