How Do You Calculate the Chandelier Exit in Forex Trading?
Chandelier Exit is a technical analysis tool used by traders to determine the optimal exit point for a trade. It is based on the idea that prices tend to move in trends and that it is possible to use past price action to identify where those trends may end. The Chandelier Exit helps traders identify when they should exit their trades in order to maximize their profits. In this blog post, we will discuss how to calculate the Chandelier Exit in Forex trading and provide examples of how it can be used.
The Chandelier Exit, also known as the “trailing stop” or “stop-and-reverse” system, was developed by Charles Le Beau and was first introduced in his book “Technical Traders Guide To Computer Analysis Of The Futures Market” (1985). The basic premise of this strategy is that prices tend to move in trends and that these trends can be identified using past price action. The idea behind the Chandelier Exit is that once a trend has been identified, traders can set an exit point at which they will close out their position if the trend reverses or if it reaches its maximum potential profit level. This helps traders protect their profits while still allowing them to take advantage of any potential upside from continuing with their trade.
The calculation for a Chandelier Exit involves two components: an upper limit and a lower limit. The upper limit is calculated by taking the highest high over a given period of time (typically 20 days) and adding an offset (typically 3 times ATR). This upper limit acts as an alert level – once the price reaches this level, traders should consider closing out their position as there may be limited upside potential remaining in this trend.
The lower limit is calculated by taking the lowest low over a given period of time (again typically 20 days) and subtracting an offset (again typically 3 times ATR). This lower limit acts as an alert level – once the price reaches this level, traders should consider closing out their position as there may be limited downside potential remaining in this trend.
Let’s say we are looking at EUR/USD on a daily chart with 20-day ATR = 0.0050
Upper Limit = Highest High + 3 x ATR = 1.1000 + 0.0050 x 3 = 1.1150
Lower Limit = Lowest Low – 3 x ATR = 1.0900 – 0 .0050 x 3 = 1 .0850
In this example, our upper limit would be 1 .1150 and our lower limit would be 1.0850. If EUR/USD moves above 1.1150, then we know that there may not be much more upside potential left in this trend so we should consider exiting our position at that point. Similarly, if EUR/USD moves below 1.0850, then we know that there may not be much more downside potential left so we should consider exiting our position at that point.
In conclusion, understanding how to calculate the Chandelier Exit can help Forex traders protect their profits while still allowing them to take advantage of any potential upside from continuing with their trade. By setting both an upper limit and a lower limit, traders are able to identify when they should exit their trades so they can maximize their profits without risking too much capital on any single trade.
