Trading with the Chandelier Exit Indicator for Stop Loss Management

The Chandelier Exit Indicator is a technical analysis tool traders use to determine entry and exit points for trading. It is a powerful tool designed for stop loss management in trending markets. If you are looking to know all about this indicator, then you are on the right platform. Learn in this article how to trade with the Chandelier Exit Indicator, and discover how to effectively set and adjust stop loss levels to protect your profits and minimize risk. Let’s begin right away.

What is the Chandelier Exit Indicator?

The Chandelier Exit Indicator is a powerful technical analysis tool that helps to manage stop-losses. It also helps in determining entry and exit points for trading. Charles Le Beau developed this indicator and explained it in his book “Computer Analysis of the Futures Market.”

Market volatility, the measure of price fluctuations in a market, lies at the very basics of the Chandelier Exit Indicator. It measures volatility by using the Average True Range (ATR) indicator. Subsequently, the indicator calculates a trailing stop-loss level based on a multiple of the ATR. 

Furthermore, where the Chandelier Exit Indicator gets plotted depends on whether the trader goes long or short. It gets plotted either above or below the price chart. The indicator gives a sell signal for long positions when the price falls below the indicator. Conversely, it gives a buy signal for short positions when the price goes above the indicator. 

How does the Chandelier Exit Indicator help traders?

The Chandelier Exit Indicator empowers traders set stop-loss orders to limit their losses if the trend reverses. Whereas, it allows their profits to grow if the trend continues. The indicator generates a series of dots above or below the price and that depends on whether the security is trending up or down. The dots indicate levels at which traders need to place stop-loss orders.

The indicator also provides a protective barrier against rising losses. How so? Because of the unique design that allows it to act like a chandelier hanging from the ceiling. Depending on market movement, it gradually moves behind as the price increases or falls. In simple terms, the indicator plots a trailing stop-loss level. That stop-loss continues to move higher when the market is in an uptrend. Contrarily, it gradually moves lower when the market is in a downtrend.

Trading strategies using the Chandelier Exit Indicator

The Chandelier Exit Indicator is a very useful indicator for traders if used correctly. The following are some trading strategies you can employ using this indicator.

1. Enter a long position

As mentioned earlier, the price trading above the Chandelier Exit Indicator indicates an uptrend. Therefore, you can enter a long position in such cases while setting a stop loss at the Chandelier Exit level. Moreover, don’t forget to use trailing stop loss below the indicator to lock your profits.

2. Entering a short position

As you already know, the price trading below the Chandelier Exit Indicator indicates a downtrend. Therefore, you can enter a short position in such cases while setting a stop loss at the Chandelier Exit level. Additionally, don’t forget to use trailing stop loss above the indicator to lock your gains.

3. Trading trend reversals

You can also use the indicator to identify potential trend reversals. The rules are simple – exit long positions when the price goes below the Chandelier Exit level during an uptrend. Whereas, exit short positions when the price goes above the Chandelier Exit level during an uptrend. 

4. Trading using multiple timeframes

Another great strategy using this indicator is to trade using multiple timeframes. As you can confirm trend direction across multiple timeframes, you can use it to your advantage. For instance, use this indicator on both the hourly and daily charts to confirm the trend direction.

5. Setting stop-loss based on volatility

You can also use the indicator to set volatility-based stop loss after entering a trade. That means you can set stop-loss levels based on the market. Thus you can exit trades based on the current market situation and control your risk management.

How to use the Chandelier Exit Indicator?

We have established that the Chandelier Exit Indicator is a very useful indicator. However, it is important to understand how to use it so that you can easily capitalize on its power. Here are the steps you need to follow to use it properly.

1. Firstly, you need to understand the basics of the Chandelier Exit Indicator. Let us give a quick recap of what this indicator is all about – it is a volatility-based indicator and uses the ATR to calculate the distance between the highest high or lowest low of the price and the Chandelier Exit (the trailing stop-loss level which keeps moving higher or lower based on the market volatility).
2. Secondly, you need to determine the trend of the market using other technical analysis tools.
3. Thirdly, you have to calculate the Chandelier Exit using the ATR. The formula for calculating the Chandelier Exit is:

Long position’s Chandelier exit = Highest high – ATR(period) x multiplier 

Short position’s Chandelier Exit = Lowest low + ATR(period) x multiplier

Where: 

The period refers to the timeframe or the number of periods you want to use for the ATR calculation

The multiplier is a value you can adjust to make the Chandelier Exit more or less sensitive to volatility changes

4. Finally, you are good to go. Always exit the long position if the price goes below the Chandelier Exit. Conversely, exit the short position if the price goes above the Chandelier Exit.