Chandelier exit is a volatility-based trailing stop that keeps traders in a trend until there is a clear reversal. It is meant to keep traders from premature exiting their trades and allow them to realize maximum returns. It was developed by Chuck Le Beau and featured in Alexander Elder’s book Come Into My Trading Room.
Chandeliers can be used for both short and long positions. The indicator consists of two lines, one above the other, which flip when price closes under or over it. It is important to remember that it is a trailing stop and not a buy or sell signal, so make sure you have a proper trading plan that avoids sideways scenarios where the indicator flips many times from long to short.
To use the chandelier, the trader must select the lookback period and the ATR multiplier. The lookback period should be long enough to capture the highest point of the up-trend but not so long that prices may revert. A trader can also choose to adjust the multiplier based on market conditions. Tech stocks tend to be more volatile than other assets, so they might require a higher ATR multiplier of around 3.
Once the user has selected these parameters, they should enter their stop loss order at the level just above or below the chandelier depending on their position. The trader should then monitor the price movement and make adjustments as needed.
When the price goes below the chandelier exit long line, it signals a possible downtrend. In this case, long position traders should close or reduce their positions. Likewise, if the price is above the chandelier exit short line, it suggests an upward trend and should be considered a good opportunity to buy.
In addition to adjusting the chandelier, traders should incorporate other tools like the Relative Strength Index and Moving Averages into their overall strategy to build a comprehensive system that can help them achieve their financial goals. By staying adaptive to market changes and incorporating other tools, the chandelier exit can help them maximize their profits.
If you are interested in using the chandelier trailing stop as a part of your trading strategy, we recommend downloading our Universal Trailing Stop EA MT5. It automatically adds the chandelier to your chart and repositions it according to the current trend direction. It is compatible with all the most popular MT4 indicators and works in both up and down trends. In addition, it has 14 other indicator-based trailing stops to choose from. This way, you can always find the best trailing stop to fit your specific trading style.