The initial stop answers one question: how much am I prepared to lose if I am wrong immediately? Once a trade is working, that question has been replaced by a harder one — how much of an open profit am I prepared to return in order to stay in a move that may still have a long way to go?
Flying a kite, you let string out to let it climb. Hold it too tightly and it never rises; let out too much and one gust takes it into a tree. The skill is entirely in how much slack you allow, and it changes with the wind.
A tight trailing stop cuts you out of every normal pullback. A loose one hands back most of the gain when the move finally ends. The wind is volatility, and the slack has to scale with it.
Four ways to trail
| Method | How it works | Suits |
|---|---|---|
| Fixed percentage | Stop sits a set % below the highest close since entry | Simple, but ignores that a 5% move means different things in different stocks |
| Moving average | Exit on a close below the 20 or 50-day average | Long, slow positional trends; very loose by design |
| Chandelier / ATR | Highest high since entry minus 3 × ATR | The standard. Adapts automatically as volatility changes |
| Structure | Below the most recent swing low, moved up as new lows form | Discretionary, and the tightest fit to how price actually moves |
- Highest high
- The best price reached since you entered, never revised down
- ATR
- Average True Range, typically over 14 or 22 bars
- Multiplier
- 2.5 to 3.5 for swing trades; wider for positional
Example: A stock reaching ₹640 with an ATR of ₹14 gives a stop at 640 − (3 × 14) = ₹598. If ATR rises to ₹20, the same formula gives ₹580 — the stop automatically loosens as the stock becomes wilder.
The trade-off, made explicit
Practical points
- Trail on closes, not on intraday touches. An intraday spike through a level takes you out of moves that closed strongly. Many Indian mid-caps produce one such wick a week.
- Do not place a resting stop-loss order at a round number. ₹500 and ₹1,000 attract clustered orders and get run more often than the level deserves. Sit a little below.
- Widen for gaps. A stop is a decision, not a guarantee. In a gap-down it fills wherever the market opens, which on a small cap can be several percent through your level.
- Use a time stop alongside it. A position that has neither triggered the stop nor made progress in three weeks is occupying capital and attention it has not earned.
- Decide the method before entry. Choosing how to trail while a position is running is choosing whichever answer you currently prefer.
A stock is up 40% and volatility has risen sharply. Using a 3 × ATR chandelier exit, what happens to your stop level?
Dor kholte ho toh patang chadhti hai; zyada kholo toh ek jhonka usko ped mein le jaata hai. Tight stop har normal pullback pe kaat deta hai, dheela stop aakhir mein zyada wapas de deta hai. Dor hawa ke hisaab se — yaani ATR ke hisaab se — chhodo, aur stop kabhi neeche mat karo.
- The initial stop protects the entry; the trailing stop protects the profit.
- A chandelier exit scales the distance with ATR, so it adapts to volatility on its own.
- A trailing stop is a ratchet — it never moves against you, whatever the reason.
- Tight trailing feels safe and systematically destroys the few trades that pay for the year.
- Trail on closes, avoid round numbers, and choose the method before entering.
Mark it done to track your progress through the curriculum.
Common questions
Short, direct answers to what people ask about this topic.
- chandelier exit meaning
- A chandelier exit is a trailing stop placed a multiple of Average True Range below the highest high reached since entry — three times ATR is the common setting. Because ATR expands when a stock becomes more volatile, the distance widens on its own in wild conditions and narrows in quiet ones, so you are not re-judging the gap by eye every week.
- how do you calculate a 3 atr chandelier exit
- Take the highest high reached since you entered, multiply the current ATR by three, and subtract. A stock that has run to ₹640 with an ATR of ₹14 gives 640 − 42 = ₹598. As new highs are made the level rises with them, and in practice it is treated as a ratchet — once raised it is not moved back down, however much the raw calculation widens.
- a stop that moves up with the price but never moves back down is known as
- A trailing stop, and the property that it only ever travels in your favour is called a ratchet. The initial stop answers how much you lose if you are wrong immediately; the trailing stop answers a harder question — how much open profit you are willing to hand back to stay in a move that may still have far to run.
- why trail a stop on closing prices instead of intraday lows
- Because a single intraday wick through the level takes you out of moves that closed strongly, and many Indian mid-caps produce one such spike a week. Trailing on closes ignores the wick and acts only on where the session actually settled. The cost is that in a genuine collapse you sit through the rest of that day before exiting.
- what happens if you tighten a trailing stop after a big gain
- Tightening after a large gain feels prudent and systematically converts the biggest winners into medium ones. Trend systems earn almost everything from the few trades allowed to run, and a stop pulled in at the two-thirds mark removes exactly those. The give-back at the end of a move is the fee for having stayed in, not a failure of the stop.