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Alexander Elder's Chandelier Exits trend-following system was first introduced in his book 'Come Into My Trading Room' in 2002. The system intends to provide better stop loss mechanisms by generating exit signals in a trending market. It includes two indicators, one used for up-trends and the other for down-trends.
Indeed, one of Elder's strategies consists in using a slow (precisely a 63-day period) moving average to make entries, and the appropriate Chandelier Exits indicator to make exits. For example, when the close price makes a new 5-day low while it is below its moving average, this can be considered as a sign for the beginning of a down-trend, and the trader should therefore go short. As soon as the close price crosses above the low Chandelier Exits indicator, this can be considered as a warning of the soon-coming end of the down-trend, and the trader should exit and recover. The same reasoning is fit for an up-trend.
Chandelier Exits formula is simple; it consists, for an up-trend, in the calculation of the Average True Range over a certain period (Elder used a 22- day period) multiplied by a coefficient (generally taken between 2.5 and 3.5), and to subtract the result from the highest high over the same period. For a down-trend, add the result of the multiplication of the ATR by the coefficient to the lowest low.
The Chandelier Exits function you can get here takes 3 parameters, the first being the period over which the calculation is done, the second the multiplication coefficient, and the last specifies whether Chandelier Exits should be calculated for an up-trend (1) or a down-trend (0).
Trading financial instruments, including foreign exchange on margin, carries a high level of risk and is not suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to invest in financial instruments or foreign exchange you should carefully consider your investment objectives, level of experience, and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with trading and seek advice from an independent financial advisor if you have any doubts.
