What is Chandelier Exit

Chandelier exit is a unique trailing stop indicator used by traders to manage their trades and limit their risks. It is considered one of the most simple and effective tools that assist traders in identifying potential exits, especially in trending markets. The chandelier exit is a technical analysis indicator created by Chuck Le Beau, who is a well-known trader in the industry. The indicator is designed to help traders determine the ideal point to close their trades by taking into account the market's volatility. The chandelier exit indicator provides a dynamic stop loss level for the trades and works by adjusting itself according to the price action of the market. As a result, traders can easily identify the optimal level to sell their positions. In this article, we will explore in depth how to use chandelier exit and how traders can incorporate it into their trading strategies for better trade management.

How to use chandelier exit?

Here's how to use chandelier exit:

1. Identify the Trend:

• Chandelier exit can be utilised to identify and follow the trend in trading.

2. Set Initial Stop-Loss:

• To use it as a dynamic stop-loss, input specific parameters.
• Parameters depend on your risk tolerance and trading style.

3. Parameter Selection:

Commonly used parameters include:

Average True Range (ATR): A measure of asset volatility.

• Typically, a 22-day ATR is used to assess short-term price range.

Chandelier Exit Period: The number of days for calculation.

• A 22-day period often aligns with ATR.

Multiplier: Determines sensitivity to price movements.

• Typically set at 3 for Chandelier Exit.

4. Implement Trailing Stop:

• Chandelier Exit serves as a dynamic stop-loss, trailing as the trend evolves.
• As price moves in your favour, adjust the stop-loss accordingly.

5. Secure Gains:

• As price continues to rise, the trailing stop secures gains by protecting against reversals.
• This allows traders to capture more profit during a strong trend.

6. Optimal Entry and Exit:

• Use Chandelier Exit in conjunction with other technical indicators for better entry and exit levels.
• This combination helps traders make informed trading decisions.

Formula and calculations

Calculating the Chandelier Exit requires the following parameters: the period of the ATR, the highest price of a stock in the 22-days period, the lowest price of a stock in the 22-days period, and a multiple called the “multiplier.”

For example, if the ATR is calculated using a 22-days period with a multiplier of 3, the Chandelier Exit Long and Short calculations would look like this:

Chandelier exit long: 22-day Highest high - ATR (22) x 3

Chandelier exit short: 22-day Lowest low + ATR (22) x 3

For example, if the 22-days ATR of a stock currently trading for Rs. 500 is Rs. 15, then the Chandelier Exit Long would be calculated as follows:

Rs. 500 - (3 x Rs. 15) = Rs. 455

So if the stock price falls below Rs. 455 after 22 days, the trader would sell their position to limit their losses.

Similarly, the chandelier exit short would look like this:

Rs. 500 + (3 x Rs. 15) = Rs. 545

So if the stock price rises above Rs. 545 after 22 days, the trader would sell their position to capture their profits.

By using the chandelier exit, traders can exit their positions with better precision than traditional fixed-stop loss methods. It is essential to note that the levels the Chandelier Exit generates are not to be used as an exact selling price. Instead, they serve as a signal for traders to review their trades and utilise sound risk management practices.

Chandelier exit example

Certainly, here's an example of how to apply the chandelier exit:

1. Identify the trend:

• Start by analysing the trend of a specific stock or index in the Indian stock market. Let's say you're interested in trading a particular stock, ABC Ltd.

2. Set initial stop-loss:

• For your initial trade, you decide to use the Chandelier Exit as a stop-loss to protect your position from significant losses.

3. Parameter selection:

Determine the necessary parameters:

• Average true range (ATR): Calculate the 22-day ATR for ABC Ltd, which measures its recent volatility.
  • Let's assume the 22-day ATR is 10 points.
• Chandelier exit period: You decide to use a 22-day period to align with the ATR.
• Multiplier: Set the multiplier at 3 to make the Chandelier Exit more sensitive to price movements.

4. Implement trailing stop:

As you enter a long position in ABC Ltd, your initial Chandelier Exit stop-loss will be:

• Chandelier exit = Highest high over the last 22 days - (ATR * Multiplier)
• Chandelier exit = (Stock's highest high over 22 days) - (10 * 3)
• Let's say the highest high is 150, so chandelier exit = 150 - (10 * 3) = 150 - 30 = 120.

5. Secure gains:

• If the price of ABC Ltd rises, your Chandelier Exit will trail along, always staying 30 points below the highest high of the last 22 days.
• For example, if the stock price increases to 160, the chandelier exit will move up to 130.

6. Exit the trade:

• If the stock's price starts to decline and hits the chandelier exit level (in this case, 120), it triggers your stop-loss, and you exit the trade.
• This allows you to secure your gains and limit your losses as you ride the trend.

Interpreting the chandelier exits

Depending on the market conditions, the Chandelier Exit can be applied to long or short positions.

1. The chandelier uptrend:

The chandelier uptrend is used to determine when to exit a long position in an uptrend market. It is plotted above the asset price and adjusts itself according to the market's volatility by incorporating the average true range (ATR) into its calculation.

The chandelier uptrend indicator follows the security's highs and is only calculated based on the highest high reached over the last "n" days, and not the current market price. When the market price falls below the Chandelier uptrend, it indicates that the trend is reversing, and it is time to exit the long position.

2. The chandelier downtrend:

The chandelier downtrend is used to determine when to exit a short position in a downtrend market. It is plotted below the asset price and adjusts itself according to the market's volatility by incorporating the average true range (ATR) into its calculation.

The chandelier downtrend indicator follows the security's lows and is only calculated based on the lowest low over the last "n" days, and not the current market price. When the market price rises above the Chandelier downtrend, it indicates that the trend is reversing, and it is time to exit the short position.

Chandelier Exit vs Chande Kroll Stop

Here are the key differences between them:

Feature	Chandelier Exit	Chande Kroll Stop
Definition	A tool used to determine when to exit a trade based on volatility	A tool used to stop losses and set targets in a trending market
Calculation	Uses ATR to calculate stop loss and volatility	Uses True Range and Average True Range to determine stops
Type of market it is used for	Good for trending markets	Works for various market conditions
Uptrend and downtrend	Has its own indicator for uptrend and downtrend	Can be used for either uptrends or downtrends
Direction of the stop-loss	Follows the highest high or the lowest low	Always above the long position or below the short position
Sensitivity to market volatility	The sensitivity of the indicator can be adjusted with a multiplier	Sensitivity can be adjusted by changing the range
Popular trading platforms	Used widely on trading platforms and charting software	Not as widely used as the Chandelier Exit

Pros and cons of chandelier exit

Pros of chandelier exit:

1. Dynamic stop-loss: Adjusts with market volatility, offering a dynamic way to protect gains and limit losses.
2. Trend following: Helps traders stay in strong trends by trailing the stop-loss, maximising profit potential.
3. Customisable parameters: Allows traders to tailor the chandelier exit to their risk tolerance and trading style by setting ATR, period, and multiplier.
4. Objective decision-making: Provides a clear and objective method for determining exit points, reducing emotional trading.

Cons of chandelier exit:

1. Whipsaws: In choppy or sideways markets, the chandelier exit can result in frequent stop-loss triggers, leading to unnecessary losses.
2. Parameter sensitivity: The effectiveness of chandelier exit depends on selecting the right parameters, which can be challenging and subjective.
3. No predictive power: chandelier exit is a lagging indicator and does not predict market reversals, so traders may still experience losses during sudden trend changes.
4. Not suitable for all strategies: May not be ideal for all trading strategies, especially for short-term traders who require different exit techniques.

Conclusion

In conclusion, the chandelier exit is a useful technical analysis tool that traders use to set their stop-loss orders and risk management. It is important to understand how to interpret the chandelier exit and choose the appropriate exit based on the market trend. By using this analysis method, traders can increase their chances of making profitable trades while minimising their losses.

Traders must use the Chandelier Exit in conjunction with other technical analysis tools and analysis strategies to make informed trading decisions that consider all the factors that may impact the market price capabilities.