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2006issue C111-4

Chandelier exits, ATR position sizing, and trailing stops

Editorial view: treat the exit as a three-part contract written before the order is sent. The archive describes an ATR-scaled chandelier distance, an equity fraction that converts that distance into size, and a trailing rule that can reuse the same volatility budget if price overruns the objective.

  • A hard stop is meant to be set before the order is placed, because a loss that is already visible makes the exit harder to accept.
  • A chandelier exit hangs an ATR multiple from the highest high or highest close so the stop distance expands and contracts with volatility.
  • For shorter horizons, ATR position sizing caps planned loss at 2% of account equity and divides that dollar amount by the per-share distance to the stop.
  • After price overruns a target, a trailing stop can be tightened so a small correction exits the remainder.
Entries in this reading3 entries
Chandelier exit4 readingsCurrent trackATR position sizing43 readingsTrailing stop93 readings

A hard stop before the order

A hard stop is meant to be set before the order is placed, because waiting until a loss is already visible makes the exit harder to accept. That working loss limit is entered with the order so the exit is decided before the position exists.

How the chandelier hangs

A chandelier exit hangs a multiple of average true range from the highest high or highest close over a 21-day window, commonly using a 10-day average true range scaled by three. The ATR multiple is adjustable for risk tolerance, time frame, and style.

The construction is a stop hung a multiple of average true range below a recent high or high close so the exit distance expands and contracts with volatility. Hanging the stop from the highest high is described as keeping the exit from rising, while a later shrink in average true range as a move matures is described as allowing the stop to tighten.

What average true range includes

Average true range is a volatility reading of typical daily range that also counts any gap from the prior close. Average true range includes the prior close so overnight gaps widen the reading. A high average true range is associated with a bottoming phase, and a low average true range is associated with consolidation or topping.

Size from the stop distance

ATR position sizing converts a planned stop distance and a fixed fraction of account equity into a maximum share count before entry. For shorter horizons, position size is obtained by capping planned loss at 2% of account equity and dividing that dollar amount by the per-share distance to the stop.

Variations and how far to hang

The chandelier construction can be varied by hanging from lows, changing the ATR multiple or lookback, substituting another range measure for average true range, and recalculating the exit daily. Stop distance is supposed to follow market direction, the entry setup, and time frame, with a longer horizon calling for a wider stop and planned reward at least twice planned risk.

A trail after the objective is overrun

A trailing stop is an exit that ratchets with favorable price so a later pullback, rather than a fixed level, closes the trade. After price overruns a target, a trailing stop can be tightened so a small correction exits the remainder.

AUY stop alternatives at the 10.30 long

For the mid-April Yamana Gold long at 10.30, the article writes down five candidate stops. The chandelier hang at 9.77 sits closest to the entry (53 cents of risk); the 50-day average at 8.82 is the loosest. These are the printed price levels, not estimates from the daily candles.
For the mid-April Yamana Gold long at 10.30, the article writes down five candidate stops. The chandelier hang at 9.77 sits closest to the entry (53 cents of risk); the 50-day average at 8.82 is the loosest. These are the printed price levels, not estimates from the daily candles.AUY · Daily · 2006-04-01T00:00:00.000Z to 2006-04-30T00:00:00.000Z

The chandelier band is given as 9.77–9.30. The 9.77 hang is 3 × ATR 0.55 from the 11.42 highest high; 9.30 hangs from the 10.91 highest close. The chart uses the 9.77 level she actually placed.

Educational research material, not investment advice. Historical source context does not establish present-day performance.
13 of 36 in the ATR position sizing track
20071-9 pp.Next on ATR position sizingConstructing a rule-based entry with Relative Strength Index and ATR position sizingA long entry is specified only when Relative Strength Index crosses above 50 and a buy is placed at 15 percent of daily ATR above the previous high on the chosen bar interval.
All readings on this track · 36 readings
  1. 1988Constructing unsigned true range for directional models
  2. 1989Evaluate an always-in ATR breakout as one procedure
  3. 1992Variable lookback and average true range as a trend-filter construction
  4. 1993A random-walk index that uses true range as its scale
  5. 1993A shared harness for trend-filter construction
  6. 1998Finish a trend with a volatility trail, wave permission, and a slower-frame veto
  7. 1999A trend filter that switches tactics and scales ATR targets
  8. 2001Filter higher lows with linear regression, then judge the exit
  9. 2003A Mechanical trading system is a maintained procedure, not only an entry trigger
  10. 2005Construction of a volatility-bounded long entry
  11. 2005Six-zone encoding of open, high, low, and close
  12. 2006Normalized average true range as a pre-entry volatility bound
  13. 2006Chandelier exits, ATR position sizing, and trailing stops
  14. 2007Constructing a rule-based entry with Relative Strength Index and ATR position sizing
  15. 2008Constructing a zero-lag TMA and heikin-ashi crossover as a complete rule set
  16. 2010Use the session-range percent stop as a pre-trade filter
  17. 2011OCA exit groups, trailing limits, and ATR stops
  18. 2011ATR bands around support and resistance for stops and targets
  19. 2013Algorithmic head-and-shoulders construction with bounded exits
  20. 2013Constructing ATR-scaled swing pivots and linear-regression divergence
  21. 2013Constructing volatility bands from typical price
  22. 2014Constructing true-range contraction filters before expansion
  23. 2015Constructing touch plans from modified true range
  24. 2015One checklist for breakout entry and ATR risk
  25. 2015Percentage true-range construction for cross-market volatility filters
  26. 2015Construct a percentage true range for cross-market volatility
  27. 2015Percentage true range as a pre-entry exposure filter
  28. 2016Constructing ATR-filtered breakout entries
  29. 2017A dividend date as a pairs-trading classroom
  30. 2018Range-based volatility as a true-range construction
  31. 2018Moving average support and volatility-band construction
  32. 2018Construct a lifecycle breakout from compression
  33. 2018Pair the book first and let volatility or range set the size
  34. 2019Trend systems need a no-trade rule
  35. 2020Average true range as a shared unit for size, pairs, and stops
  36. 2020Volatility sizing and target-risk leverage as a pre-trade gate
By fieldStops and loss limits43 readingsBy year200689 readings
All 43 readings tagged ATR position sizing
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