This filter uses the “Chandelier Exit” to consider an instrument as a buy or sell. It is good for spotting trend reversal, and is usually implemented as a Sell or Cover Filter (Stop Loss).
The Chandelier Exit is calculated by finding the highest or lowest price during a specified period, and then subtract/add such price by the multiplied ATR.
During an uptrend, the Chandelier Exit will subtract the highest price of the period by the multiplied ATR, thus the Chandelier indicator appears below the prices most of the time. If an instrument's closing-price goes below this indicator, it's a strong sign the trend will reverse toward a downtrend. Such condition is good for exiting a Long Position, or entering a Short Position.
Now, during a downtrend, the Chandelier Exit will add the lowest price of the period by the multiplied ATR, thus the Chandelier indicator appears above the prices.
If an instrument's closing price goes above the indicator line, it's a good sign the trend will reverse toward an uptrend. Such condition is good for entering a Long Position, or exiting a Short Position.
It's important to note: due to the way this filter is calculated, the indicator line never goes down during an uptrend. Ditto it never goes up during a downtrend.
Such behavior means the filter is good as a stop-loss: The stop-loss line will go higher as the price goes higher, thus locking your profit from a downward movement (if the price hits the indicator, the strategy will exit the position).
It also applies for a Short Position: As the price goes lower, the stop-loss will also go lower; so, your profit is protected from an uptrend (whenever the price goes upward and hits the stop-loss, your Short Position will be exited).
1. The first parameter defines whether you're looking for instruments that close “Above” or “Below” the Chandelier indicator.
2. The second parameter defines the period to look for the Highest/Lowest price, as well as the ATR duration.
3. The third parameter defines the ATR multiplier. Usually you want to input a value of up to 3 here. Which means if the closing-price breaks that 3x ATR, it's a strong indication of a trend change.
But if the portfolio's volatility is high, you may want to increase this value, so you don't get false signals due to the ups and downs of the price.
4. The fourth parameter, “Dynamic Multiplier”, will automatically change the ATR multiplier if the instrument's volatility changes.
In other words, you don't set the ATR multiplier manually; the strategy will set it for you, depending on volatility.
In Portfolio Boss, the Chandelier Exit is called “Perfect Stop”, and if you use this filter, a “Perfect Stop” indicator is shown on the instrument's Price Chart.