%b System #1 With Chandelier Stop

This is the same as %b System #1 except we replaced the trailing stop with the Chandelier method. I've heard of the Chandelier stop before in Dr.Alexander Elder's "Come Into My Trading Room". I came across it again in the Oanda forums, specifically this post.

Here's what a user called EZCurrency said (HHV = highest high value, LLV = lowest low value, ATR = average true range):

For a trailing stop for a long, I use HHV(H,24)-3.5*ATR(24) on an hourly chart. This is the highest high value of the past 24 hrs, then subtract 3.5 times the average range of the past 24 hrs. This accounts for the volatility. Plot it and you will see it is an excellent trailing stop for most pairs!

Another user, Gouranga, then came up with a possible improvement:

One can combine this with a LLV(n) (eg. Long Trade) and take the higher trailer of the two. LLV(n) trailer locks in profit when market consolidates. While (HHV - ATR) locks in profit when market trends. So, you get the best of both mkt conditions.

We provide both of these indicators in ATM - what is described in the first quote is referred to as the "Chandelier Stop", and that described in the second quote is referred to as the "Better Chandelier Stop" (whether it is actually better or not is subject to some backtesting).

But this is a good time to demonstrate exactly what happens when you enter more than one value, so forget that we made the "Better Chandelier" for a second. What ATM will do with the trading system below, for the longs anyway, is calculate both the Chandelier Stop and the lowest low. Then it will take the higher of those two values. For shorts it will take the lower of the Chandelier Stop and the highest high.

The basic theory of using the ATR in order to calculate the stop loss, is that it's adaptive to the current market conditions. During volatile periods the stop will be placed further away, and during less volatile periods the stop will be brought closer to the current price. Basically it adjusts the amount of wiggle room based on the volatility.

In very rough testing, we used 5-Minute bars, 720 for the Bollinger period, which is kind of big, and the normal 2 standard deviations above and below. The period for the ATR is 24.