First of all let us define what an institutional investor is.
Investopedia.com defines an institutional investor as follows: A non-bank person or organization
that trades securities in large enough share quantities
or dollar amounts that they qualify for preferential treatment and lower commissions. Instituional investors face fewer protective regulations because
it is assumed that they are more knowledgeable and better able to protect
themselves.
Hereby we can assume that investopedia is reffering to pension funds, mutual funds, hedge funds, insurance companies, investment banks etc. The institutional counterpart has a larger amount of equity to invest than an average commercial trader and the reasons why they trade a specific instrument can have various backgrounds: An institution might buy an instrument to close a short position or it might buy so that its mutual fund fills a specific fund criteria. Usually institutional trading can be noticed trough the order book, or watching the trade volume. As per se the institutions trade high volume contracts they might buy in blocks so that the market supply is enough and their market exposure is not too obvious. The funds originate mostly from the customers deposits. As the institution is obligated to maximize the customers returns it simply cannot spray it´s funds around the market. An institution trades relying on a definitive trading strategy. This strategy has been back tested and has been approved by the board. Thus we can define a few important steps to start trading like the big boys do:
1. Create a trading strategy that is easy to understand and has definitive conditions ( can be explicated in a mathematical equation, technical parameters or code)
2. Back test the strategy (e.g. manually or by programming it). Try to be as realistic and objective as possible.
3. If the strategy shows satisfying returns write the strategy down and hang it on the wall next to your trading station
4. Trade ONLY on the basis of the strategy! Rely on your strategy since it has proven to be somewhat profitable in the back testing phase. Every strategy shows negative returns at times. These periods may take several days to weeks, even months.
5. Put every trade in a table (e.g. an excel sheet) and derive statistics from them. Every trade has to be written down and rationalized with your strategy. In the future you can then look back at the failures and even try to avoid them in the future.
