Delta Neutral Stop Strategy

The #1 Goal using our trading approach is to get your Trade to Delta Neutral.

This article will explain what it is – and why you want to use it on every scalp trade.

The Delta Neutral Stop is a technique we employ after a trade is filled – to manage the trade once it’s open. Delta Neutral is just a fancy term we use for “Virtual Breakeven” and once you have achieved Delta Neutral you have no risk of losing money in that trade (excluding commission).

It’s very simple but it is imperative that you understand it – and use it every time.

Here’s how it works:

1)  You enter a trade with 2 contracts and place a 2 point Stop

2)  When the trade moves 1 point in your favor – you sell 1/2 the position (1 contract)

3)  You then move the Stop up 1 point

Now your trade is at “breakeven” or “Delta Neutral” and it’s a no-lose trade.

While the concept seems simple – it forms the basis of our strategy because we want to reduce the risk on every single trade – as quickly as possible. Scaling out 1/2 then moving the Stop up an equal distance creates a “no lose configuration”.

You can choose to use a different “initial target” – and when it gets hit – you take half-off the position – and move the stop an equal distance from your Entry. The reason we call it Delta Neutral or Virtual Breakeven is that most traders think of “getting to breakeven” means moving the stop to the entry, which typically doesn’t allow enough distance to avoid the stop getting hit.

This multi-contract approach is a superior method because it allows you to take partial profits, eliminate all the risk, and still stay in the trade for a bigger move with a reduced position size.

The Main Goal of trading the Range Breakouts is to take a Precision Entry that will have a high probability of getting you to the Delta Neutral Target.

Once you master the technique of getting to Delta Neutral you will find that on trades that don’t get much follow-through, they simply turn into “scratch” trades, but you don’t lose money and you don’t take a full stop-out. The Breakout Alerts that get traction – will follow-through to hit T2 – the Macro Target(s) and you just trail the stop to stay in for larger moves.

The Delta Neutral Stop reduces risk on every trade.

Here’s an easy way to think about it. By setting our first target say 1-point over our Entry – then selling half the position there (and sliding the stop up a point) we are eliminating all risk when a trade fizzles and doesn’t get any follow-through. This can happen during dull market conditions and on choppy market days – even when price breaks out of the range and moves through the Trade Price Barrier.

If you take a couple trades and get stopped-out at breakeven, it’s no harm – no foul, but then the very next trade the price may get traction and go on to be a “runner”. The 4-6-8-10 point Runners are where the money is made.

Since we don’t always know which Alerts that “break out of the Range” will follow-through to become runners, the Delta Neutral Stop gives us the confidence to participate – because it reduces the chance of taking a Full Stop-Out. We get our stop to breakeven quickly and the big winners will take care of themselves – over the longer series of trades.

Using this strategy – every 1-point move past the Trade Price Barrier (Range High or Range Low) is a no-lose trade.

Typical Point of Entry Scenarios

Scenario 1 – Price moves straight to the Delta Target after entry with little or no drawdown
Scenario 2 – Price moves slightly against you before hitting the Delta Target
Scenario 3 – Price is not able to reach the Delta Target and results in a full stop-out

Notice that 3-tick and 1-point Delta Targets are used interchangeably in these examples – as well as 1.5-point Delta Targets and 2-point stops. The reason is that market conditions vary and it makes sense to have flexibility to adapt to different conditions. The concept is exactly the same.

In a fast, high-volume active market the 1-point Delta Target, 2-point Stop configuration will have a high degree of success.
In a slow, dull low-volume market the 3-tick Delta Target, 1.5-point Stop configuration will likely work better.

Note that we recommend using stops and targets based on ATR’s, so you can adjust the initial Target and initial stop distances based on current market conditions and the size of the Dynamic Trigger Range.

You’ve seen the image below in several places on our website – and now that you understand the Delta Neutral Stop strategy – it should make sense. Employing this breakeven strategy means that only 1/3rd of potential outcomes is a losing trade.

Here’s the ATM strategy setup in Ninja 8 that implements the Delta Neutral strategy.

It goes in with 2 contracts and a 2 point stop. If prices moves 1 point in your favor, it sells 1 contract and slides the stop up 1 point – and goes for a 4 point target on the remaining contract.

Part 1: