Chande Kroll Volatility Stop Indicator: Tutorial

Trend indicators

Chande Kroll Stop
  • The Chande Kroll Stop indicator is made of two lines.
  • It automatically allows placement of protective stops based on both upward and downward volatility.

Tushar Chande and Stanley Kroll suggested the Chande Kroll Stop indicator in their book “The New Technical Trader”. It is a trend-following indicator, detecting stops by calculating the average true range of the volatility of the recent market.

The indicator tries to grab the momentum of the instrument. It oscillates between -100 and 100 with an overbought level of 50 and an oversold level of -50.

What is the Chande Kroll Stop indicator?

The Chande Kroll Stop indicator automatically allows placement of protective stops based on both upward and downward volatility.

As a result of this, the Chande Kroll Stop indicator depends on the Average True Range that makes it possible for traders to measure the volatility of parity. Volatility movements will not affect the stop of this indicator. This can only happen if the trend turns around.

The Chande Kroll Stop indicator comes with a long stop line (blue) and a shortstop line (red). You should place the stop under (and on) the high/low of the last “n” bars. The difference corresponds to the Average True Range on “N” bars.

The Chande Kroll Stop protects profits by making it possible for a trade to remain open, as long as it is moving in the right direction. Traders don’t have to manually reset the trailing stop because it is flexible, just as the fixed stop-loss. Close your long position should once prices drop below the blue line. On the other hand, close the short positions should if prices move above the red line.

Lastly, you can use the Chande Kroll Stop to detect trend changes. You can discover a new uptrend when the blue line crosses above the red line. You can discover a new downtrend when the red line crosses below the blue line.

The general concept for these indicators is to keep your position open as long as it moves in the right direction. These trailing stops are flexible, automatically tracking price and don’t have to reset manually. Close your positions should if the price goes against the trade by a specified amount or percentage. 

Two lines make up the Chande Kroll Stop

1. The level of stops for long positions

This stop is the lowest reached during the time. If the price goes in your direction, the stop will follow. But if the price drops, the stop will not change. 

2. The level of stops for short positions

This is the highest stop reached during the time. If the price goes in your direction, the stop will follow. But if the price goes down, the stop will not change.

What the Chade Kroll Stop indicator tells traders

As its name suggests, traders can automatically set the level of protection to stop up or down with this indicator. At the same time, it takes into account the underlying volatility of every security. 

Two lines make up the indicator; the stop level for long positions and the stop level for short positions. The highest attained by the value is the stop for long positions. Therefore, when the price progresses in your direction the stop goes up and remains fixed when the value drops. 

In the same way, the stop level for short positions, known as a short position. Its calculation depends on the lowest reached by the value. The use of the Average True Range, measures the volatility of each security. So, the stop allows traders to locate the maximum stop level, placed outside the price levels. Sudden market movements can affect it.

This is a trend-following indicator that detects the stop-loss for a short or long position by using a variation on directional movement

The average true range of the volatility of an instrument can calculate it. Place the stops under (and on) the high (low) of the last “n” bars. The variation is proportional to the Average True Range on the bars.

You can use the Chande Kroll to trade in some ways:

  • Sell when the price crosses lower than both lines
  • Buy when the price crosses higher than both lines
  • Trade when the two lines cross each other

As the price moves sideways you will observe that the lines start flattening out, and the price will trade broadly between the two lines. Ensure that when you trade it is always in the direction of the trend.

Calculation method

Stop on purchase = Highest of Stop preliminary to purchase on Y periods

Where, preliminary purchase stop = Highest of X periods – (Coefficient * Average True Range of X periods)

Stop sale = Lowest of Stop preliminary sale over Y periods

Where stop preliminary sale = Low of X periods + (Coefficient * Average True Range of X periods)

Indicators used

The indicator uses three parameters:

  • ATR period: This parameter determines the time for calculating the volatility of the value and the preliminary stop level. The author uses 10-period ATR.
  • Stop period: This parameter determines the calculation time of the last stop. The author uses 20 periods for this.
  • Multiplier or Coefficient: It determines the distance at which the stop will be apart from the prices. For instance, the multiplier of 3 means that you will place the stop at 3 times the average volatility of the value.

Analysis

Close a long position when the price crosses down the line showing the stop for long positions. Also, close a short position when the price crosses upwards the line showing the stop for short positions.

Interpretation of the Chande Kroll Stop indicator

This indicator is a potential stop for a position (short or long). A green and red line overlaid on the price chart shows it. The green line is the stop position for a long period and the red line is the stop position for a short period. 

The true range and as a result calibrates it, it doesn’t depend on the volatility of the instrument. Have it in mind that true range is the highest in the absolute value of the 3 following values:

  • Current bar High-Current bar Low
  • Current bar High-Previous bar close
  • Current bar Low-Previous bar close

You can find the preliminary stops under the high and higher than the low of the final p bars. The difference is that they are proportional to the average true range over P bars.

It is possible to put a stop-buy when you notice a breakout of the upper band. Traders can also place a stop-sell upon the breakout of the lower band.

How to use the Chande Kroll Stop on the stock market?

Generally, use the Chande Kroll Stop indicator to manage stops and open new positions. However, traders can use it to detect changes in trend. You can see a new upward trend when the blue line crosses over the red line. Also, you can see a new downtrend when the red line goes lower than the blue line.

How to configure the Chande Kroll Stop?

The originator of this indicator advises traders to use 20 periods for this parameter for the stop period. The author uses the 10 period ATR for the Chande Kroll Stop indicator having the ATR.

The Chande Kroll Stop indicator comes with a long stop line (blue) and a shortstop line (red). Traders should place their stops under (and on) the high/low of the last “n” bars. The difference is the same as the average True Range on “N” bars.

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