The Chandlier Stop: Learn To Sell Stocks More Profitably
Ask just about any trader about a stop-loss or trailing stop and every single one of them will have advice on how to use them
. But, what about managing profitable trades?
One of the most difficult skills for novice traders to master is the art of profit taking. Ask yourself this question: Have you ever sold out of a position, only to find the stock has gone up drastically right after you sold it?
Don't fret, as this happens to every trader. The best you can do is to try and find a way to manage your trades, take enough profits to ensure you don't take a loss, and then learn how to let profits run!
Of course, there exists no perfect method for profit taking. Therefore, as active traders, it is necessary to construct a consistent and repeatable profit taking plan. It is perfectly acceptable to have multiple price targets, as well as several different technical and time based methods of selling stocks to maximize your profits.
Historically, traders have used such methods as percentage gain targets, price targets, targets based on chat patterns, and even fibonacci number levels. However, Many of these methods are ambiguous and leave much to the discretion of the trader. Fortunately, there is a method that is based on the actual movement of the stock you are in that is both systematic, and easy to implement.
Introducing the Chandelier Stop.
The Chandelier Stop was invented by professional Trader Charles Le Beau, and is a volatility based trailing stop method that uses Average True Range at its core.
Average True Range was developed by Welles Wilder order to measure a stocks volatility. ATR (acronym for Average True Range) is a a 14 day simple moving average of true range. True range is simply the greatest of the following:
* The current High less the current Low.
* The absolute value of the current High less the previous Close.
* The absolute value of the current Low less the previous Close.
The benefit of formulating true range in this way is that true range represents all of the price movement from close to close, including gaps.
The ATR value indicates how much up or down a stock has moved, on average, over the defined period. High values indicate that prices are changing a large amount during the day, hence high volatility. Low values indicate that prices are staying relatively constant, hence low volatility.
The Chandelier stop applies a multipe of Average True Range to "hang" a trailing stop from the highest high achieved since opening the trade for bullish stocks, and from the lowest low of the trade for bearish stocks.
As you can see, the Chandelier Stop moves as price moves, and adjusts based on the stocks volatility. This can help a trader let profits run, helping them to sell stocks more profitably.
Le Beau recommends setting profit taking rules around the multiplier used in setting the Chandelier Stop. Upon opening the trade, he recommends setting the Chandelier stop 3 to 3.5 ATR away from the price at which the trade was opened.As profits increase, Le Beau suggests tightening the Chandelier Stop. Upon achieving 3 ATR of profit, he recommends tightening the Chandelier Stop to 2 times ATR. Traders should also consider setting levels and rules for closing out part of their position in order to protect profits.
By consistently implementing the Chandlier Stop trailing stop method, you will be able to sell stocks more profitably. It will enable you to protect profits, prevent losses on an otherwise winning trade, and force you to let profits run on at least some portion of the original trade. You will be able to set the ATR multiplier to a range that comfortably fits your trading style, as well as risk tolerance.
by: Steve Warshaw
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