LeBeau suggests that traders should close a long position at the highest high minus 3 ATRs, or at the highest close minus 2.5 ATRs.
The stop loss is placed at multiple ranges from the high and as the price moves progressively higher the indicator moves up and so would your stop loss. If the price reverses, the indicator does not follow it back down and once the price crosses through the line the position should be closed.
This indicator is used as to generate a volatility based exit. It uses the average true range to plotlines above or below the price depending on which way the market is moving.
The indicator was created by Chuck LeBeau to keep traders in a trade that is with the trend and prevent you from closing a trade before the trend has run its course. In general market conditions the Chandelier Exit will be above the price during a downtrend and below the price during an uptrend.
The default settings for the Chandelier exit indicator are using a 22-day period and a multiple ATR.
Chandelier Exit (uptrend) = 22-day High - ATR(22) x 3
Chandelier Exit (downtrend) = 22-day Low + ATR(22) x 3
Some of the issues with this indicator can clearly be seen in the below image. Although the distance of the indicator line is substantial because it does not trace back spikes can still take you out of a trade too early. The Chandler Exit should only be used when the market is trending so it should be used in combination with a trend spotting indicator such as multiple moving averages, MACD or the Aroon Indicator.