Re: Stupid but essential question
 

Eastbay, I can't stand reading all the comments to your question, but I'll answer to the best of my ability.

I'll explain four types of traders.

There are market makers. I hope you understand this concept, but briefly, it's an individual (a trader) who takes positions on both sides, and makes his living on the "spread" between the ask and the bid.

Second, there are traders who create unique kinds of opporutnities. For example, they can take large sums of money (hundreds of millions) and create synthetic investment opportunities for small investors. (Example: Owning zero coupon bonds,with leveraged derivatives to give the small investor, very limited downside and a capped upside). There are traders who deal with large block trades, traders who deal with hedging, etc. In fact, John Henry, owner of the Red Sox, runs one of the biggest public managed futures portfolio in the country.

Futures traders. These guys make very huge moneys. In fact, I often wonder why they even offer this product to the individual investor. Their historical success is so unbelievable magnificent, it almost seems like the kind of things they keep close to the vest. Manged Futures is initself a very interesting strategy. I've had more training in this product than most, and I find it very attractive. It's all technical analysis, driven by a constantly changing algorithm. It's all math stuff, things you'd probably find fascinating.

Finally, the trader you're probably thinking about. The typical trader for his own account. Good ones, are generally right about 53-58% of the time (same is true for managed futures traders). There are not many of these. And their profits come in spurts, perhaps just once a year.

Re: Stupid but essential question
 

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But I'm a poker player and a curious analyst, and I want to learn how to think about the markets beyond "buy an index", but most of what I see passing as analysis seems kind of silly. The language around "technical analysis" seems like 99% hokum. My BS detectors are in full swing when I read about "wave theory" and "support" and "resistance" and "breakout". There's no foundation there. In poker the statistics of the deck provide a foundation and the rest is making good guesses about the people playing the game.


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Technical Analysis, Elliott Wave theory, things I've studied. If you want to read about this kind of stuff, you should begin with the founder. This all begins with Dow Theory. Charles Dow hypoethesized this theory in the late 1890s - early 1900s, and it was carried out by Robert Rhea, editor for the WSJ for the first quarter century of the 1900s. FWIW, I continue to believe in Dow Theory, and read Richard Russell's newsletter (Dow Theory Newsletter).

What's very attractive about dow theory is it's foundation in simplicity. You cannot have a significant move in the Dow Jones Industrial Average without a similar move in the Transportation Average. In otherwords, if the transportation companies aren't busy, then you're in a false economy. Off of this theory, technical analysis was born.

PM me if you have further interest in this topic. But I think reading the book is a good first start. It's more story-like, then textbook. But I am always intrigued how others can study the concepts born from this idea, but have never read this book.

Re: Stupid but essential question
 

Futures traders. These guys make very huge moneys. In fact, I often wonder why they even offer this product to the individual investor.

Just like in poker 90% of futures traders lose because of transaction cost.

Re: Stupid but essential question
 

Investment banks are not funds.

The investment banking traders you refer to are mostly functional, trading on behalf of their clients (pension funds etc). The fund manager rings them up and says something like "Jim, get me 500 million of vodafone over the next few weeks when you can" and the traders comply. The trader will have an order book, of what all his clients want to buy/sell and at what conditions, and all day every day he tries to get the best for them. The bank will take a few hundredths of a percent commission.

Why do fund managers trade all the time? Well, everyone has their own targets and their own hopes. Some (hedge funds) believe they have superior analysis tools and look to make a quick profit buying/selling over the period of hours, exploiting small fluctuations in prices. They dont care if a stock has a good future or not, in out like a whippet.

Others (pension funds) are there for the long haul, try to purchase strong stocks, and would keep them for much longer (months/years).

Everyone has degrees of risk too.

There are lots of reasons why people trade, all different.