Chandelier Exit

Chandelier Exit

The Chandelier Exit is basically avolatility-based system that identifies outsized price movements. Le Beaudefined volatility by using the Average True Range, which was developed byWelles Wilder, creator of RSI and the Average Directional Index. ATR uses theprior close, current high and current low to determine the “True Range” for agiven period. After some smoothing, the daily True Range values evolve into theAverage True Range for a given period of time.

By setting the Chandelier Exit forlongs three ATR values BELOW the period high, the indicator provides a bufferthat is three times the volatility. A decline strong enough to break this levelwarrants a reevaluation of long positions. The opposite applies to shortpositions. The Chandelier Exit for shorts is set three ATR values ABOVE theperiod low, which provides a volatility-based buffer. An advance strong enoughto exceed this level warrants a reevaluation of short positions.

Chandelier Uptrend and forex signals

Sometimes chartists will see astrong uptrend, but not know where to jump on and when to exit. The ChandelierExit can be used to define the trend and set a trailing stop-loss. The examplebelow shows Eaton Corp (ETN) breaking out in early November and starting anextended uptrend. The Chandelier Exit defined this uptrend quite well as itfollowed price action steadily higher. This trailing stop-loss could have beenused to control risk for new long positions.

With the Chandelier Exit providingthe stop-loss, traders would then need to find an indicator to trigger buysignals within this trend. A sensitive momentum oscillator can be used tocapture short-term oversold conditions. The indicator window shows StochRSI,which is the Stochastic Oscillator applied to RSI. Dips below .20 reflectshort-term oversold conditions. A subsequent move back above .20 suggests thatthe uptrend is continuing.

forex signals Chandelier Downtrend

Some stocks are more volatile thanothers and require a bigger buffer, which means the multiplier should beincreased. The Hewlett-Packard (HPQ) example shows the stock in a cleardowntrend for most of 2012. A normal Chandelier Exit (22,3.0,short) would havetriggered some stops just before the downtrend continued. Notice how HPQ movedabove the dashed gray line several times during this downtrend. Chartistsshould increase the ATR multiplier for more volatile stocks, such as techs. Inthis example, the red Chandelier line allows for more volatility by using 5 asthe multiplier. HPQ held this Chandelier setting until the breakout inmid-December, which signaled the start of an uptrend.

The Chandelier Exit is good forstops, but chartists need to use basic chart analysis or a momentum oscillatorto time entries. The Commodity Channel Index (CCI) can be used to identifyshort-term overbought conditions within a downtrend. CCI becomes overboughtwith a move above +100. A subsequent move back below +100 signals that momentumis turning down again.

The Chandelier Exit is mostly usedto set a trailing stop-loss for forex signals during a trend. Trends sometimesextend further than we anticipate and the Chandelier Exit can help traders ridethe trend a little longer. Even though it is mostly used for stop-losses, theChandelier Exit can also be used as a trend tool. A break above the ChandelierExit (long) forex signals strength, while a break below the Chandelier Exit (short) forex signals weakness. Once a new trend begins,chartists can then use the corresponding Chandelier Exit to help define thistrend.

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