- May 30, 2022
- Posted by: CoachShane
- Categories: Trading Article, Trading Indicators
What Is The Chandelier Exit
The Chandelier Exit indicator is a volatility-based indicator that pinpoints stop loss placement with the help of the Average True Range calculation. The name “Chandelier” is no mistake as the indicator calculation “hangs” from the highs (or lows) of current price. The purpose is to keep a trader in a trade as long as the trend is intact.
Once price moves against the position a set true range multiple, the trade is exited.
Being a volatility based trailing stop indicator, the Chandelier Exit will bring the stop closer to price during low volatility. If there are periods of higher volatility, the stop will begin to stay further away from price. This is a result of the average range of prices increasing and decreasing.
This feature allows you to take advantage of momentum moves in price without being stopped out prematurely as the stops adjusts to the price action. In fact, the ATR multiple of 3 is designed to keep you in the trend longer as opposed to taking just a general swing in the market.
How Do You Use The Chandelier Signal
Once a trader enters a position during the trading day, the normal procedure is to set a stop loss. While one trader may decide to use a profit target, trend following traders prefer to let the trade run using a trailing stop-loss.
Using the Chandelier Exit as a trailing stop enables traders to stay in strong trending markets longer than exiting at a fixed target. Once volatility starts to decrease, the trailing stop moves closer to price so traders do not give back too much profit.
This stop loss will hang from the absolute high (or low) and extend below price (or above), giving a true stop in line with the full range of price. As price movement evolves, the stop will trail in line with the calculation. As with all stop loss techniques, you do not move your stop loss further away from price.
While the Chandelier trailing stop is meant to have you exit when the trend changes, it is not a selling or buying signal indicator. It is not designed to be used as a trade entry.
Indicator Calculation And Settings
The Chandelier indicator will have two lines: one for short positions and one for long positions. It will flip to the opposite once price crosses the line. The general rule is to close your positions once the indicator gets triggered but do not open a trade in the other direction.
We have 3 different settings we can adjust:
Lookback Period – This is the number of price highs/low to look back to calculate the highest high or low in that period of time.
ATR Multiplier – This X times the ATR and is usually 3.
The default setting of the Chandelier Exit recommended by Charles Le Beau is bar period = 22 and multiplier = 3.
The calculation is simple although your charting package will do it for you.
Chandelier Exit Short = n-bar Lowest Low + Multiplier x ATR(n)
Chandelier Exit Long = n-bar Highest High – Multiplier x ATR(n)
You can adjust the n settings but the risk is having too close a stop as well as stop too far away from market action. If your Chandelier Exit is too close, you can get taken out of the trade with normal market fluctuations. Too far a stop can result in giving back too much in the way of profits as you stay in the trade when it was obviously going to fail.
Bottom line is we want to get the maximum gains possible while exiting the trade when conditions have obviously changed.
Using Chandelier In Uptrends
As the price of the instrument makes higher highs and higher lows, you are in an uptrend and looking for long trading positions. That is the simple price action definition of an up trend in the market. Being able to stay in the trade while the uptrend is intact, is a good use of the indicator.
In this daily chart example, we have a breakout trade entry from a double bottom and a trend line break.
As the stock continues to trend higher, the indicator tracks under price. On the right side of the chart, you can see the final stop location before the selloff happened.
As a trader, you may have a buffer zone below the Chandelier to avoid getting taken out of your position on simple fluctuations in price. Part of your trading plan would include your decision of exiting on touch of line or specific price under the line. While some traders may exit at close, this runs the risk of a large move against you before you exit.
The easiest way to use the indicator is to trail the stop after the period closeses and continue to lock in gains before the stop price is hit. In this case, the stock ran 66% before exiting.
Chandelier In Downtrend
Here we have a price action down trend and also an upsloping trend line break. Assume you enter short on the break of the trend line and your initial stop is at the red line above entry.
As long as price continues to make lower lows, the stop will continue to be adjusted helping you lock in gains. Notice on the right, as price forms a trading range, the red chandelier stop line has not moved. Your stop would be at the red line looking to lock in a 6% gain on this short trade one price crosses the line.
Trailing stops are great for attempting to capture a large portion of a trending move. Using the highs or lows of price plus ATR as we do with the Chandelier indicator, gives you plenty of opportunity to catch the meat of the move.
As long as the trend continues to run, the Chandelier will help keep you in the trade without being concerned with getting “ticked out” on a wild swing.
While you can adjust the indicator settings, ensure you are comfortable with the loss of profits or being spiked out of the move. Frustrations for both can lead to traders doing things outside of their trading plans in order to make back what they feel there were cheated out of. Disciplined trading is the key.
Using the Chandelier Exit as a trailing stop, enables traders to stay in strong trending markets longer than exiting at a target. Once volatility starts to decrease, the trailing stop moves closer to price so traders do not give back too much profit.
While the Chandelier trailing stop is meant to have you exit when the trend changes, it is not to be used as a trading signal. Keep in mind that during sideways scenarios, there will be many flips of the indicator from long to short. Ensure you have a proper trading plan that avoids choppy markets and use the chandelier exit as it was intended.
Thank you for your plainly written articles, and the links embedded to the article for quick and easy reference. These insights are extremely helpful compared to all the dry, technical articles that expect the reader to already be a master of all things trading related.
I appreciate you, and when/if I become more profitable I will buy any book you are selling to show my gratitude.
I do go green even in this messed up market and thanks to you I hope to scale that up in the near future.