What is a Chandelier Exit designed to do?

A Chandelier Exit is specifically designed to measure intrinsic volatility and set stop levels in trading strategies. This technique utilizes the Average True Range (ATR) to help traders define a trailing stop that adjusts based on the security's volatility.

The method involves calculating a predetermined number of ATRs above the highest high over a set period for long positions (or below the lowest low for short positions). This means that the exit point is dynamic; it changes as the price of the asset moves. By incorporating the ATR, traders can set a stop level that accounts for the asset’s price fluctuations, allowing traders to remain in a position longer during significant trends while safeguarding profits by locking in gains when volatility suggests a potential reversal.

This tool effectively provides a balance, enabling traders to manage their risk without prematurely exiting a profitable trade, as the stop level adjusts upward with price increases in a long position (or downward in a short position) based on market volatility.