We have often advocated the importance of good outputs, and offer you a "chandelier exit" as one of the most effective. Stop is located at a distance of several average true range (ATR) from the highest point of the market or from the highest close of the bar, which were recorded from the opening position. Due to the fact that the peaks are moved only upward, and our stop or move up or left in place.
(In this and other examples, we assume by default that the position is opened in the direction of the rising trend, and a declining trend with cases will stipulate specifically). This output was so named because the order to close a position is placed at some distance from the top of the market like a chandelier hanging from the ceiling.
We give examples of the trading strategy of "going chandeliers":
- Place a stop at a distance of 3 ATR from the highest point of the market with the opening of the position;
- Stop is placed at a distance of 2,5 ATR from the highest bar close to the opening position.
"Chandelier Exit" is our priority exit, which is used in the development of trading systems, trend following. It allows you to hold a position almost until the end of the trend and is only triggered when there are serious conditions that the trend reverses.
Studies of our colleague and friend of Van Tharp has shown that by using this method out, you can open a position at random, and thus after a while still trading become profitable. You can check this on a variety of markets.
The range of best values of ATR, in our opinion, should be between 2,5 ATR 4 ATR.
Log on volatility.
Log on volatility is one of the most reliable triggers for entry systems, following the trend. Our studies have shown that this input has a greater winning percentage in comparison with a random occurrence.
Purchase order should be set to a level which is calculated as the sum of the closing of the previous period plus a percentage of the average true range (ATR), or the opening of the current bar plus a percentage of the average true range (ATR).
For example, the rule for the purchase can be: buy today at a price of 0,7 * ATR + today's opening.
To calculate the ATR is necessary to take a sufficiently long period of time - 20 days or more. If you take a lesser period, the trigger input may be too sensitive for short periods of low volatility.
This trigger input is one of the most reliable triggers due to the fact that its operation is necessary that the prices have made quite a strong move in the direction of the trend. Of course, so we do not enter the market at a very low price, but the open position when the market is definitely confirm its original direction.
In this case, we sacrifice a part of the profit potential for higher reliability of entrance into the market.
Using this method, enter the starting point is usually taken to close the previous bar, but we recommend to take the opening of the current bar. In our view, moving from today's opening is better supported by the fact that short-term trend turned in the direction of long-term trend. In developing the trading system should be checked both options, although there are others, such as use as reference points the previous top or bottom bars.
Combine the trigger volatility with "Chandelier Exit" and you'll get the basic components of the primitive trading system, following a trend that can be used as a useful benchmark to test your trading ideas.
Insert the items separately instead of the standard components that you would like to test and compare the results. If your test results exceed the results of testing the components of the standard, then it is logical to use a pre-planned trading system proposed by the component to you.
Thus, the reference system can serve as a guide to which you should seek the design of the trading system, and possibly surpass it.