The chandelier exit as a trailing stop

[Fairman]

The chandelier exit as a trailing stop

The chandelier exit is a trailing stop that hangs from the highest high since entry, at a distance of a multiple of ATR. For a long, it's the highest high over a lookback period minus, say, three times ATR. For a short, it's the lowest low plus the same distance.

What makes it different from a plain fixed pip trail is that it adapts to volatility. In a quiet market, the stop sits closer. In a volatile one, it gives more room. It also only moves in the trade's favour, since it hangs from the extreme.

It suits trend following trades held for a while. For quick scalps, it's usually too wide, since three ATR on M5 might be bigger than your target.

The settings are where people go wrong. A lookback of 22 bars and three ATR is the common default, from daily charts. On intraday charts, those numbers might not fit. Testing a few combinations on your own data helps. Smaller multiples get you out sooner but with more shakeouts. Larger multiples hold longer but give back more.

One quirk: since it uses the highest high over the lookback, not since entry, it can sit above your entry right after a trade starts if there was a recent high. Using the high since entry instead fixes that for trade management.

[Fairman]

ATR expands during a move, especially a fast one, which pushes the chandelier further away just as the move gets going. That can be good, giving room during a strong trend, or frustrating, giving back more profit when the move reverses sharply. Some people use a fixed ATR value from entry instead of the current one, so the distance doesn't expand during the trade. It's a different trade-off, and testing both on your instruments shows which suits your style better. Freezing the ATR at entry also makes the stop easier to plan, since you know the distance in advance.

[Fairman]

It also works as a trend filter, not only an exit. If price is above the chandelier line for longs, the trend is intact. If it closes below, the trend might be over. Some people use it that way, only taking longs when price is above the long chandelier and shorts when below the short one. It's similar to other volatility based trend filters like SuperTrend. They're all variations on the same idea of price relative to a volatility band from recent extremes. Used as a filter, the settings can be wider than for an exit, since the goal is to identify the trend rather than protect profit.

[FXS Prop Desk]

The chandelier exit works nicely for trends because it gives room in volatile phases and tightens in quiet ones. For scalping, the multiplier usually needs to be smaller than the common value of three, since the targets are short. Something between 1.5 and 2 times ATR on M1 or M5 is a typical starting range.

One thing to watch is the start of the trade. Before price makes a new high after entry, the chandelier hangs from an older high, which can put the stop in a strange place. Many traders use a normal initial stop and switch to the chandelier only after the first new high.

[Fairman]

The chandelier works best when the trade has had time to develop. Right after entry, the highest high since entry is close to the entry price, so the stop sits roughly three ATR below it, which might be wider than your initial stop. In that phase, using your normal initial stop and only switching to the chandelier once the trade has moved in your favour by a set amount avoids having a wider than planned stop early on. Then the chandelier takes over the job of trailing once there's a real move to protect.

[Fairman]

How does it compare with a simple ATR trailing stop from the current price? The chandelier hangs from the highest high, so it only moves up when a new high is made. A plain ATR trail from the current close moves up and down with price and needs a rule to stop it moving down. The chandelier's structure naturally prevents backing off, which makes it simpler. But it can be slow to tighten in a trend that's grinding sideways after a peak, since no new high means no update. Each has situations where it fits better.