Chandelier Exit
Staying in a profitable trade while price is rising is easy. The challenge is when price pulls back and our profit drops. A trailing stop loss indicator is a useful tool for profit preservation and assessing the potential end of a trend. The trailing stop loss I usually use in my trades is the Traders Average True Range. Traders ATR is not available on all trading platforms so I experimented with using the Chandelier Exit. Its similarity to the Traders ATR made me curious as to what the differences might be and whether they produced similar exits in a trend.
Chandelier Exit
The Chandelier Exit (CE) is a trailing stop loss indicator based on the ATR with an adjustable tolerance for volatility with the use of a ‘Multiplier’
Formula for Long Trades:
Chandelier Exit = Highest High (over N periods) - (ATR * Multiplier)
Charles Le Beau, who created the CE formula recommended a 22 day period as optimal with a multiple of 3 times the ATR. The significance of 22 represents 22 trading days in a month.
Multiplier is a factor typically ranging between 2.5 and 3.5. A common value is 3.
ATR is calculated over a 22 day period.
Substituting into the above formula, the CE for a long trade will look like this:
Chandelier Exit = Highest High (over 22 days) – (ATR (22) *3)
Formula for Short Trades:
Chandelier Exit = Lowest Low (over N periods) + (ATR * Multiplier)
Substituting into the above formula, the CE for a short trade will look like this:
Chandelier Exit = Lowest Low (over 22 days) + (ATR (22) *3)
This is how the CE trade indicator looks on the chart.
The CE line in green trails price as it moves up, shifting the stop loss level higher and protecting profit. Once price breaks down through the green CE line, it indicates weakness in the uptrend. The signal to sell appears and the line becomes a trailing stop loss in red on the short side.
In reverse, once price breaks up through the red line and closes above it, strength in the trend is signalled and the green line starts again.
Adjusting the sensitivity of the CE line is made by changing the multiplier of the ATR. A higher multiplier allows for more volatility before the stop is triggered, while a lower multiplier increases sensitivity. A higher number for the ATR plots the CE line further away from price action resulting in more room for price volatility movement.
Average True Range
An ATR is a volatility indicator measuring the average price volatility of a stock over a specified period. The ATR developed by Welles Wilder measures the average range between high and low prices over a specified period. It shows the average range a security moves within a specific period.
Accounting for volatility, the ATR can be used as a stop loss level adjusting upwards as price continues to trend.
The ATR is commonly calculated as a moving average of 14 periods of the true range.
True range is the greatest of the following:
Current high minus the current low.
The absolute value of the current high minus the previous close.
The absolute value of the current low minus the previous close.
The Traders ATR I use in my trading was developed by Daryl Guppy.
Using a 14 day period, a multiplier of 2 is used, ATR*2. The Traders ATR line only moves up when price moves up whereas the original ATR moves up as well as down alongside price. If price is lower than the previous day the Traders ATR line moves horizontally.
A setting common with many traders is a 14 day period of the true ranges and a multiplier of 2 or 3.
Advantages of the Traders ATR
· The Traders ATR indicator line is placed directly beneath price compared to the standard ATR where the line is opened as another window below the price chart.
· Traders are able to set the starting point for the indicator.
This is how the Traders ATR indicator looks on the chart for a 14 day period with a multiplier of 2.
The Traders ATR line in red trails price as it moves up, shifting the stop loss level higher and protecting profit. Once price closes below the ATR line, the uptrend may be over and the trade is normally closed for a profit.
Stop Loss Exits: Chandelier vs Traders ATR
Reflecting on a past trade where I used the Traders ATR, I was interested in any change of the final trade result had the Chandelier Exit been used instead of the usual Traders ATR.
CU6 CLARITY PHARMACEUTICALS
The area of interest was in the second leg breakout of the uptrend. Investors and traders were buying and supportive of the uptrend in place. Both groups had widely separated exponential moving averages and the gap in between showed the trend strength was strong. There was a high probability of trend continuation.
Position Opened
🎯 Target Profit 5.79
❇️ Entry at 4.45 as marked
🛑 Stop Loss at ATR 3.56
Price hit a closing high of 8.65. From this area, CU6 was sold off and an end of trend was signalled as price closed below the Traders ATR at 6.79.
This trade was held open past the target profit price and eventually closed at 6.34 as marked by the purple arrow. A profit of 42%.
Compare the signal triggered on the CU6 chart using the Chandelier Exit line. The Traders ATR from the previous chart used a 14-day period and multiplier of 2. On the following chart, the CE uses a 22-day period and a multiplier for the ATR of 3.
For this trade, the signal of weakness in trend was signalled at the exact same candle as the original trade.
The difference was a CE line price trigger of 6.55 compared to the Traders ATR line trigger at 6.79. A higher stop loss exit price is closer to price action, resulting in a difference of 3.66% more profit.
Similar results were observed using the Chandelier Exit indicator. It may be considered as an alternative to the Traders ATR in the case where it is not available on a trader’s preferred trading platform. As with every indicator it is not a standalone signal for a buy or a sell. Combining other indicators and any observations from back testing may give a better picture of its suitability in a trading strategy.