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Knowing
the Ins and Outs of Chandelier Exit
Have you ever
heard of a stop placement strategy that trails stop based on previous
'high' points? It is called Chandelier exit as it hangs down from
the high point or the ceiling of our trade, just as a chandelier
hangs from a room ceiling. The distance, which is usually calculated
from the high point to the trailing stop; could also be calculated
in dollars or in contract based points. However, the value of this
trailing stop moves upward very promptly as higher highs is reached.
The Chandelier
Exit, which has a trailing stop from either the highest high of
the trade or the highest close of the trade, is best measured in
units of Average True Range (ATR). One of the many factors leading
to use ATR for measuring the distance from the high to our stop
is that, it is pertinent across markets and is adaptive to changes
in unpredictability.
The essence
of this calculative measure is that, even on expansion and contraction
of trading ranges, our stop will automatically adjust and move to
the apt level, thereby, constantly staying in tune with changing
market conditions. Chandelier Exit is one of the most tried exit
methodology used across a varied portfolio of futures markets to
generate profitable test results.
It is imperative
that the changes in unpredictability can curtail or stretch the
distance to the actual stop, since the highs used to hang the Chandelier
move only upward. However, in order to witness less fluctuation
in the stop distance, you can use a longer moving average to calculate
Average True Range. In other ways, shorter moving average is required,
in case you want the stop placement to be more adaptive to fluctuating
market conditions.
When short averages
for the ATR is used; brief periods of small ranges can bring the
stops too close, abnormally resulting in premature exit. To avoid
this, you can have a short and highly adaptive ATR while calculating
a short average and a longer average and using the average that
produces the widest stop.
Although Chandelier
Exit differs from Channel Exit (which trails a stop based on previous
'low' points), the combination of both, where the trade is initialized
by the trailing Channel Exit and then adding the Chandelier Exit,
after the price has moved away from the entrance point, will help
in making the open trade lucrative. Here the Channel Exit is fastened
at a low point and does not move up as new profits are accomplished.
At the same time, it is necessary to have the Chandelier Exit at
the right position so that the exits are never too far away from
the high point of the trade.
The fundamentals
behind combining the exit techniques, Channel and Chandelier exit
is that, while Channel Exit as a suitable stop that very steadily
rises at the commencement of the trade, switching over to Chandelier
Exit is necessary to ensure better exit that protects more of our
profit. This feature makes Chandelier Exit one of the most sought
after rational exits from the profitable trades.
About the Author
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