Indicator Toolbox – Chandelier Exits

The original Analysis Toolbox articles discussed the various market cycles including trends and continuations. This part of the The Trader’s Indicator Series focuses on the Indicator Toolbox, as we will discuss various indicators that are found on most trading platforms. We will discuss the indicator in the context of the chosen market, and if it resonates with you, please continue to do your own analysis with it. Trading successfully is all about feeling comfortable with a methodology and using that system repeatedly even when boredom sets in. I will be discussing indicators in alphabetical order that can be found on the MotiveWave platform. (for a free 2-week trial CLICK HERE)

In the last series, called The Trader’s Pendulum, we took you through the 10 Habits, all aimed to support a successful trader. Your mission in developing these habits is to get out of the Technical Trader’s Trap and transform into an Entrepreneurial Trader so that you can start being accountable to your trading. We invited you to take action and begin your journey by completing the Trader’s Scorecard (www.fxtradersedge.com/scorecard) and to get down to business by arranging a free coaching session. In this Indicator Series, we talk about the mechanics of trading.

Chandelier Exits

Chandelier Exits (CE) was authored by Chuck LeBeau. CE identifies stop loss exit points for long or short positions. Optional entry points are also displayed. CE uses an Exponential Moving Average to determine the current trend; then the Average True Range times a user defined factor is either, depending upon the trend, added or subtracted from the highest high or lowest low.

INTRODUCTION

Chandelier Exits (CE) set a trailing stop-loss based on the Average True Range. Once a trader enters either a long or short position, the indicator is set to long or short and produces a training stop-loss. This indicator is designed to keep a trader in the trend trades for as long as the trend extends, when the typical trader will exit the trend early and not take advantage of the full move.

The CE formula uses 3 variables in the calculation, the period high or low, the ATR of that same period, and a factor which is a multiplier:

CE long = 22-period High – ATR (22) x 3

CE short = 22-period Low + ATR (22) x 3

The 63-period exponential moving average is how CE defines the current trend; when prices are above (below), the current trend is up (down). MotiveWave uses the default setting of 22 UpTrend and DnTrend Periods; CE looks for the highest high or lowest low of the last 22-periods and if using the daily charts, the period will be 22 days which is the number of trading days in a month. As per the formula above, the CE long takes 3 times the ATR (22) and subtracts it from the 22-period High to calculate the stop-loss. The chart below shows a 4-hour gold chart with the stop-losses calculated for a long position.

As per the formula above, the CE short takes 3 times the ATR (22) and adds it to the 22-period High to calculate the stop-loss. The chart below shows a 4-hour gold chart with the stop-loss calculated for a short position.

 

USING THE TOOL

Chandelier Exits are based on volatility, as Le Beau defined volatility by using Average True Range, which was developed by Welles Wilder. The long exits are set three ATR values below the period high and the short exits are set three ATR values above the period low. Triggering these stops puts the current trend in question and it is better to be safe by capturing some of the trend, than to be sorry only to give back all the profits.

Traders will often see a strong trend and not know where to trigger the long or short trade and where to exit. This indicator shows where to exit but it can also be used to show where to enter as in the same 4-hour gold chart below. The trader can set the indicator to “Short” once price is below the 63-period EMA and trade short positions. The brown rectangles indicate shorts and the green rectangle is the stop-loss.

This next example shows long trades on an hourly chart with the corresponding stop losses. Longs are entered once price is above the 63-period EMA (brown line) and the stop is calculated based on the formula above.

Learn how the Chandelier Exits help keep traders in the trend longer. Start incorporating the Chandelier Exits into your chart set-up. Finally, use the Chandelier Exits in developing trading strategies.

See you next week for another “C” indicator!

If your mission is to become a trader or investor who stays out of the Technical Trader’s Trap, then take the leap to grow into an entrepreneurial trader.

I created the FX Trader’s EDGE Coaching Program modelled after the “10 Habits of Successful Traders”, which is the title of my newly published book by Wiley.

The Trader’s Pendulum: The 10 Habits of Highly Successful Traders.  Copyright (c) 2015 by Jody Samuels.  This book and ebook is available at all bookstores, online booksellers, and from the Wiley web site at www.wiley.com.

 

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