Chandelier Exit (CE) is a volatility-based indicator that provides exit points for stop-loss orders on long and short positions. The CE indicator was created by Chuck Le Beau, a well-known authority on exit strategies. Though it wasn’t until 2002, when Alexander Elder’s “Come into My Trading Room” was released, that the approach was first exposed to traders.
Chandelier exits are named after the chandeliers that hang from the ceilings of homes. The chandelier indicator gets its name because its analysis “hangs” from the current price’s highs (or lows). The goal is to maintain a trader’s exposure to a trend for as long as possible. Here, you’ll learn more about the Chandelier Exit Indicator and how to use it in your trading.
What is the Chandelier Exit Indicator?
The chandelier exit strategy relies on the ATR indicator. Its purpose is to keep traders in line with the trend until a certain reversal occurs. The purpose of the indicator is to keep traders from bailing out too soon rather than riding out a trend. A chandelier exit is often located above prices in a downtrend and below prices in an uptrend.
CE is used by traders to determine where to place stop-loss orders and how much profit to take from a trade. The Chandelier Exit is based on the idea that an asset’s price is more likely to change direction after making a move against the trend that is three times its average volatility. When calculating the CE value, it takes into account the high and low prices for a specified period.
Chandelier Exit Indicator Strategy
When trading in a trending market, chandelier exits are often used as a stop-loss mechanism.
- Exit long positions when the price crosses below the Chandelier line
- Exit short positions when the price crosses above the Chandelier line
Because of the risk of whipsawing in and out of a trade, chandeliers cannot be used for entry purposes like other volatility tools. After a prolonged uptrend or downtrend, the major goal of using a chandelier exit is to signal a likely trend reversal to the trader. Traders frequently use tight trailing stop losses during periods of low volatility. To maximize their profits, they may then close their trades near the apex. During low-volatility trading sessions, the likelihood of a trend reversal is minimal. Although higher volatility trading uses a larger trailing loss to protect against volatile price action.
Charles Le Beau, an expert in technical analysis, suggested that the chandelier exit be used with an input period of 22 and a multiple of three times the average true range. An input period of 22 is used since there are typically 22 trade days in a given month. Because there are 22 price levels, temporary price movements are possible. On the other hand, professional traders can change the risk and trading strategy parameters to suit their own needs.
Buy Signal
- Wait until a candle closes over the Chandelier Exit.
- Enter a long trade in the currency pair upon the opening of the following candle.
- A stop-loss order should be placed a few pips below the Chandelier Exit after considering the volatility of the currency pair.
- As the price reaches new highs, keep moving the stop-loss higher.
Sell Signal
- Wait until a candle closes over the Chandelier Exit.
- Enter a short trade in the currency pair upon the opening of the following candle.
- A stop-loss order should be placed a few pips above the Chandelier Exit after considering the volatility of the currency pair.
- As the price reaches new lows, keep moving the stop-loss lower.
Conclusion
The combination of price extremes and the ATR in the Chandelier indicator gives traders enough chances to catch most of the move but does require plenty of practice and skill to get right. The chandelier can help you to stay in the trade without becoming “ticked out” on a wild swing as long as the trend remains in place.
Chandelier Exit is most often used as a stop-loss technique rather than for a signal generation, according to expert traders. This is because when used as a trading signal, it has a natural tendency to send false signals. One must trade with discipline. If you practice enough, you’ll be able to manage false signals better and trade with confidence.
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