Time & Price Algorithmic Trading: Execution Protocol

Summary

In this lecture, the execution protocol of a trading strategy is outlined, focusing on entry points, invalidation levels, and target setting. After reviewing environment selection, higher and lower time frame protocols, the lecture emphasizes how to execute trades by identifying three key reference points: entry, invalidation, and target. Two types of invalidation levels—Type 1 and Type 2—are introduced, with detailed explanations of how to set stop losses based on market structure. The goal is to align trading actions with market flow and adjust based on risk/reward factors for optimal execution.

Takeaways

• 😀 The execution protocol is the focus of the lecture, building on previous concepts like environment selection, higher time frame, and lower time frame protocols.
• 😀 The setup requires three key reference points: entry, invalidation level, and target.
• 😀 Target 1 is the original consolidation level, and Target 2 is the drawn liquidity above the consolidation.
• 😀 Invalidation levels are determined based on market structure, using Type 1 and Type 2 invalidations to define stop loss placement.
• 😀 Type 1 invalidation occurs when the stop loss is placed below the smart money reversal or the lowest buy in accumulation stages.
• 😀 Type 2 invalidation involves confirming low formations using market maker models on a lower time frame to tighten the stop loss.
• 😀 Entries are based on the left side of the curve, using support arrays that act as entry points for the trade.
• 😀 Targets and invalidation levels are fixed price levels, with the main variable being the entry point that adjusts based on risk/reward considerations.
• 😀 Constantly scanning for new entries and invalidation levels is crucial, as a large stop loss can reduce risk-to-reward ratio, making the trade less favorable.
• 😀 The lecture outlines the need for trade management in execution, as invalidation levels evolve during the trade's development to ensure the trade aligns with the overall strategy.

Q & A

What are the three key reference points needed for executing a trade in the protocol?

The three key reference points are: 1) **Entry Point** – where to enter the market, 2) **Invalidation Level** – the stop loss, 3) **Target Level** – where to take profits.

How do you define the two targets for a trade?

The two targets are: **Target 1** – the original consolidation, where most of the position is taken off; and **Target 2** – the draw liquidity, which is typically above the original consolidation.

What is the difference between **Type 1** and **Type 2** invalidation levels?

**Type 1** invalidation is when the stop loss is placed below the smart money reversal (following a confirmed lowest buy stage). **Type 2** invalidation occurs when the stop loss is placed below a confirmed swing low, typically after the price forms a retracement high followed by an expansion lower, used when Type 1’s stop loss is too large.

Why is it important to use **Type 1** invalidation over **Type 2**?

Type 1 invalidation is generally higher probability because it follows a confirmed smart money reversal, indicating stronger market structure. Type 2 is less certain as it anticipates the formation of a low, which may not always develop.

How do **market maker models** help in confirming a low formation?

Market maker models are used to identify retracement highs and expansions. A retracement followed by an expansion lower indicates a sell model, while a retracement followed by an expansion higher indicates a buy model. These patterns help in confirming a low formation for Type 2 invalidation.

What role does the **left side of the curve** play in entries?

The left side of the curve represents previous support or resistance levels. Once price moves into the right side of the curve and is placed above a support array formed on the left side, it becomes an entry opportunity.

How should traders approach **entries** in a trade?

Traders should constantly scan for new entry opportunities based on price interactions with the left side of the curve. Once price moves into the right side, forming potential support, it signals a potential entry.

What happens if the **stop loss** is too large relative to the **target**?

If the stop loss is too large, it results in a poor risk/reward ratio, which makes the trade less favorable. In such cases, the trader should reconsider the entry point or wait for a better setup with a more favorable risk/reward.

How does the **execution protocol** differ from earlier protocols like the **higher time frame** or **lower time frame protocol**?

The execution protocol is focused on the actual trade execution process, where traders define their entry, stop loss (invalidation), and target levels. The higher and lower time frame protocols focus on identifying trends and setups, which feed into the execution phase.

Why is **trade management** crucial to the execution protocol?

Trade management is critical because as the trade progresses, both the invalidation level and targets may evolve. Adjusting these elements ensures the trade remains aligned with the market, helping traders manage risk and maximize profitability.