Last updated on June 23rd, 2020
Using the Chandelier Exit as a trailing stop in trading includes using volatility that is based on the Average True Range Indicator.
The name “Chandelier” is no mistake as the indicator calculation “hangs” from the highs (or lows) of current price.
Since the Chandelier Exit is calculated using the ATR, the trailing stop will be further from price during high volatility and closer during low volatility. This feature allows you to take advantage of momentum moves in price without being stopped out prematurely.
In fact, the ATR multiple of 3 is designed to keep you in the trend longer as opposed to a general swing in the market.
How Do You Use The Chandelier Exit
Once a trader enters a position, 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 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 becomes closer to price.
The difference is that this exit 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 for trade entries.
Indicator Calculation And Settings
The Chandelier Exit will have two lines: one for short positions and one for long positions. It will flip to the opposite once price reaches either of the lines.
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:
- Look Back Period – This is the number of price highs/low to look back to calculate the highest high or low in that period. Usual setting is 22 periods.
- ATR Period – Number of periods to use for the Average True Range. This is usually set at 22 period.
- ATR Multiplier – This X times the ATR and is usually 3. A move of 3 times the ATR is generally considered a large move and you’d want to be out of your position.
The exit 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 and 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.
Using Chandelier Exit In Uptrends
As the price of the instrument makes higher highs and lows, you are in an uptrend and looking for buying signals.
In this example, we are coming off of a downtrend and price gaps up from a range. Assume you are long after the break.
As the Apple stock continues to trend higher, the indicator tracks under price. On the right side of the chart, you can see the exit indicator turn red which signifies your trailing stop has been hit and price closed below.
As a trader, you may have a buffer zone below the Chandelier Exit to avoid getting taken out of your position on a price probe. 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.
Chandelier Exits In Downtrend
As a market makes lower lows and lower highs, you would be considering short only trades.
This is a one hour chart and price on the left is consolidating. We have a breakout/pullback and you’d be short.
The Chandelier Exit is now above price and you can see how it gives price room to run in the middle of the chart. As the candlesticks get smaller, meaning smaller range, the trailing stop gets tighter to price before eventually breaking to the upside.
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 Exit, gives you plenty of opportunity to catch the meat of the move.
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.