Forex traders use a variety of technical indicators and tools to help them make informed decisions about their trades. One such tool is the chandelier exit, which is a popular stop-loss indicator. This article will explain what the chandelier exit is, how it works, and how to calculate it.
What is the Chandelier Exit?
The chandelier exit is a technical indicator that helps traders determine where to place their stop-loss orders. It was developed by Chuck LeBeau and is based on the average true range (ATR) of a security. The chandelier exit is used to determine the maximum amount of price movement against a trader’s position before they exit the trade.
The chandelier exit is calculated by taking the highest high of the past “x” number of days and subtracting “y” times the ATR. The resulting value is the chandelier exit level. If the price of the security reaches this level, the trader is signaled to exit the trade.
The chandelier exit is typically shown on a chart as a line that moves up or down depending on the direction of the trade. When the price is moving in the trader’s favor, the chandelier exit moves up, indicating that the stop-loss should be moved higher. When the price is moving against the trader, the chandelier exit moves down, indicating that the stop-loss should be moved lower.
How to Calculate the Chandelier Exit
Calculating the chandelier exit requires a few steps. First, the trader needs to determine the number of days to use in the calculation. This will depend on the trader’s trading style and the time frame they are using. A common value for “x” is 22 days.
Next, the trader needs to determine the value of “y” to use in the calculation. This value will depend on the volatility of the security being traded. A higher value of “y” will result in a wider chandelier exit, which is appropriate for more volatile securities. A lower value of “y” will result in a narrower chandelier exit, which is appropriate for less volatile securities. A common value for “y” is 3.
Once the values of “x” and “y” have been determined, the trader can calculate the chandelier exit as follows:
1. Calculate the ATR for the past “x” number of days.
2. Determine the highest high for the past “x” number of days.
3. Subtract “y” times the ATR from the highest high to get the chandelier exit level.
For example, if a trader is using a time frame of 22 days and a value of 3 for “y,” they would calculate the chandelier exit as follows:
1. Calculate the ATR for the past 22 days.
2. Determine the highest high for the past 22 days.
3. Subtract 3 times the ATR from the highest high to get the chandelier exit level.
Using the Chandelier Exit in Trading
The chandelier exit can be used in a variety of trading strategies. One common use is to trail the stop-loss behind the price as it moves in the trader’s favor. This allows the trader to capture more profits as the price moves up while still protecting their downside.
Another use of the chandelier exit is to enter trades based on breakouts. When the price breaks above or below the chandelier exit level, it can be a signal to enter a trade in the direction of the breakout.
The chandelier exit can also be used in combination with other technical indicators to confirm trades. For example, if the price is above the chandelier exit and a bullish candlestick pattern forms, it can be a signal to enter a long trade.
Conclusion
The chandelier exit is a popular technical indicator used by Forex traders to determine where to place their stop-loss orders. It is based on the average true range of a security and is calculated by taking the highest high of the past “x” number of days and subtracting “y” times the ATR. The resulting value is the chandelier exit level, which can be used to trail the stop-loss behind the price or enter trades based on breakouts. By understanding how to calculate and use the chandelier exit, Forex traders can make more informed trading decisions and better manage their risk.
