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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).
