The 1st Goal of our trading approach is to get your Trade to Delta Neutral.
This article will explain what it is – and why you should use it on every single trade.
Delta Neutral means “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 once you start using it – on every trade – it will vastly improve your success
Here’s a basic overview using the ES as an example:
1) You enter the 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 eliminate the risk of losing money – as quickly as possible. Scaling out 1/2 then moving the Stop up an equal distance creates a “no lose configuration”.
Note that we are not moving the stop up to our entry point. Since we’ve already captured 1-point in profit on half the position, just moving the stop an equal distance 1-point puts the trade at Delta Neutral.
Keep in mind that you can choose to use either a 3-tick or 1-point “Delta Neutral Target” depending on market conditions.
The Main Goal of the Alerts in the Power Emini Desktop Software is to give you Precision Entries 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 simply turn into “scratch” trades, but you don’t lose money and you don’t take a full stop-out. The Range Breakout Alerts that do get traction – will follow-through and go on to hit the additional Target(s) or you can simply trail the stop to stay in for the bigger move.
Notice we use very tight stops – our goal is to Trade Around Breakeven – or score Big. We don’t take large stop-outs – ever.
The Delta Neutral Stop Trick Reduces Your Risk on Every Trade.
The Delta Neutral Stop technique is part of the Trade Management that’s employed after an Entry is filled. Here’s a look at the two phases.
Here’s an easy way to think about it. By setting our first target 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 our Range.
If you take a couple trades and get stopped-out at breakeven, it’s no big deal – just a scratch, but then the very next trade the price may get some good 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 make big moves or 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 series of trades.
When you use this strategy – keep in mind that every 3-tick or 1-point move past your entry price 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 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 – you are just adjusting your tolerances based on current market conditions.
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.
You’ve seen the image below on our website – and now that you understand the Delta Neutral Stop strategy – it should make perfect sense.
The Delta Neutral Stop Move Strategy is designed to work with the Signal Alerts in our software – and is the Best Trading Tactic to Reduce Risk when Day Trading the Futures Market. It prevents us from letting a winner turn into a loser and “getting to Delta Neutral” (our phrase for “breakeven”) is the #1 goal on every single trade. It the best risk-management strategy you will find anywhere.
Setting Up An ATM Strategy:
Here’s Why You Should Set Up An ATM Strategy For The Delta Neutral Stop Strategy
First of all, whenever you enter a trade it’s a good idea to have your stop placed automatically. This protects you from catastrophic loss in the event your power or cable goes out (or something happens to your computer). The last thing you want is to be in a trade without a hard protective stop in place. Anything can happen.
Another good reason to have an ATM set up is that the market can move fast. In the blink of an eye – before you have time to react – price can spike (in either direction) and you missed out on selling at your Delta Target – or suddenly the market moves against you much further than where you had planned to place your stop.
Big Price Moves “Out of the Blue” Are Common
We’ve all seen it happen – the market is coasting along and everything looks normal – then all of a sudden a news item (or Tweet) hits the tape and the price jumps or plunges in an instant. If you don’t have your Targets and Stop already set by your ATM strategy then you just missed out. Sure there’s a chance that the move could be in your favor, but sometimes the spikes reverse just as quickly as they started and there’s very little time to react. On the flip side the sudden price surge could go against you with catastrophic results. It is simply not worth taking the risk of being in a trade without already having your Stop and Targets set by your ATM strategy.
Using an ATM strategy for your Delta Neutral Stop will ensure that you get filled – even when the move happens quickly. Every experienced Futures trader knows that the price can move faster than you can react – using your mouse.
How to Set Up An ATM Strategy in NinjaTrader 8
Here is a good Default ATM to start off with. This ATM uses 2 contracts and employs our Delta Neutral Breakeven Stop strategy. As I’ve explained, the advantage to having an ATM set up is that as soon as you place an entry order – it automatically places a stop and targets for the trade. You can use this ATM as an example and set up a couple different ones to use in different market conditions.
The ATM strategy shown above starts with 2 Contracts and sets an initial 2-point stop as soon as you enter the trade. The first “Delta Neutral Target” is 1-point, where it sells 1 contract and then automatically moves the stop up 1-point (at that point the trade is at Breakeven). Then it goes for a 4-point Target on the second contract.
NOTE: When setting up this ATM you must set the same Custom Stop Strategy Parameters for both Target 1 and Target 2. See on the top image how the “Stop strategy” has “custom” for both – that’s where you set it.
Keep in mind that there are times where the “price action” is dull and may be trading in a narrow range – and a 4 Point Target isn’t going to be feasible. Under those circumstances you can use a different ATM with tighter tolerances (more below). The ES is not always going to make a big move when it breaks out of the range and you can adapt to that by managing your trailing stop manually (once you’re at breakeven) and reducing your Target. You should be aware of current market conditions and adapt your expectations to the behavior and ranges you see at the time.
You don’t always have to sell at the pre-programmed Target – you still have the option of sliding your Target up if the market looks like it’s starting to take off in your favor.
Once your trade has reached “Delta Neutral” and the first contract has been sold for a 1-point profit, you still want to actively manage the Stop on the remaining contract. You will want to move the stop along with price to protect profits. When you see 3 higher lows (in the case of a Long) above your entry price you can move your stop up to your entry, thus insuring at least a 1-point gain on the trade. (A 1-point gain on the first contract that automatically sold – and the second contract gets sold at your entry point if the price reverses).
We call that the 3-Bar Breakeven Stop Trick – which we will cover in another post.
Here’s an example of a Delta Neutral Stop trade configuration you might use in a narrow-range market. While the stop is still at 2 points (to allow for normal price fluctuation) the Delta Target is 3-ticks and the second scalp target is 2.25 points.
It’s fairly easy to get a 3-tick move in your favor, at which point you’re at breakeven so don’t be too concerned that it’s still using a 2-point stop. You could use 1.5 points instead but you don’t want to get knocked out by normal fluctuation just to watch the price turn back and move as anticipated. That’s a quick in-and-out scalp configuration that will net 3-points on a winner and it can play out very quickly.
Final Thoughts and Summary:
If you’ve been trading long enough, you’ve probably experienced just about every type of situation that can happen. You get in a trade that moves in your favor at first – then it fades back in the opposite direction before you had time to react – and turns into a loss. Using our Delta Neutral Stop Strategy will eliminate that – as long as you get just enough movement to trigger the “sell 1/2 and move to breakeven” which only needs to be 3-ticks to a point.
We’ve all had a trade open and experienced a sudden price movement – where there’s little time to react – and you are forced to make snap decisions. Having a pre-planned trade using an ATM strategy will give you peace of mind. Also a big benefit of the ATM strategy is that you can trade consistently. In other words you are using the same Stop and Target – getting to breakeven – and not just trying to “wing it”. It will bring consistency to your trading.
There will be times where you’re in a trade and a split-second price spike takes out both your Delta target and your 2nd Target before you would have had time to react.
As mentioned above, it’s a good idea to have several ATM strategies – using the Delta Neutral Stop Strategy – set up so that you can vary them for different market conditions. If the market is hot you go for the 4-point+ target. If the market is choppy and dull, trading in a narrow range, you go for a 2 or 2.25 point target and use a 3-tick Delta Target and a 6-tick stop.
The main takeaway here is that you want to start using the Delta Neutral Stop along with an ATM strategy and it will increase your odds and eliminate mistakes – and having to make snap-decision judgement calls.