Chandelier Exit Indicator

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.

What Is The Chandelier Exit

The Chandelier Exit is a volatility based trailing stop indicator that is calculated using the ATR and is designed to help you exit from long or short trading positions.

The trailing stop will be further from price during high volatility and closer during low volatility as the average range of price increases and decreases.  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 a general swing in the market.

 

How Do You Use The Chandelier Signal

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 moves closer to price so traders do not give back too much profit.

The difference is that 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 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.
  • ATR Period – Number of periods to use for the Average True Range.
  • ATR Multiplier – This X times the ATR and is usually 3.

The default Chandelier Exit setting 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 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 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 have a breakout trade entry of a previous swing high.

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 big selloff happened.

As a trader, you may have a buffer zone below the Chandelier 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.

The easiest way to use the indicator is to trail the stop after the candle closes and continue to lock in gains before the stop price is hit.

 

Chandelier In Downtrend

As a market makes lower lows and lower highs in this stock chart of PINS, you would be considering short only trades.

You noticed a complex pullback on this chart and enter a trade when it breaks down.

As long as price continues to make lower lows, the stop will continue to be adjusted helping you lock in gains.  This trade would be $10 in the money per share at the time of this article.

 

In Conclusion

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.



Author: CoachShane
Shane his trading journey in 2005, became a Netpicks customer in 2008 needing structure in his trading approach. His focus is on the technical side of trading filtering in a macro overview and credits a handful of traders that have heavily influenced his relaxed approach to trading. Shane started day trading Forex but has since transitioned to a swing/position focus in most markets including commodities and futures. This has allowed less time in front of the computer without an adverse affect on returns.

1 Comment

  • Jason Houchins

    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.
    Thank you.

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