A New Look at

Exit Strategies
A presentation by Charles LeBeau for the
Australian Technical Analysts Association
Melbourne, Australia - October, 2006
For a free copy of this PowerPoint
presentation send an e-mail to
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Exit Priorities
 1. Set initial stop loss to protect capital.
 2. Add trailing stops to reduce risk.
 3. Add a breakeven stop.
 4. Protect open profits.
 5. Take profits efficiently.

It will probably require multiple exit

strategies to handle all of the above.
Three Important Exits

 1. The Chandelier Exit

 2. The Yo Yo Exit
 3. The Modified Parabolic Exit
 Introducing the
Average True Range (ATR)

 The Average True Range is the largest of

the following:
 Today’s high minus today’s low.
 Today’s high minus yesterday’s close.
 Today’s low minus yesterday’s close.
Range
True Range

“True” range adjusts for gaps

Sketch - True range bars

 The Chandelier Exit
 A stop is placed 3 (?) Average True Ranges
from the highest high or highest close since
entry of the trade.
 The stop moves upward as new highs are
made.
 The length of the chain on the Chandelier
will automatically adjust to changes in
volatility.
 Adjusting the Chandelier Exit
 Start new trades with default exit of 3 ATRs
from entry.
 As profits are accumulated, reduce the ATR
units to lock in more profit.
 Example: when open profit reaches four
ATRs, reduce Chandelier to two ATRs.
 Example: when open profit reaches six ATRs,
reduce Chandelier to one ATR.
 The Yo Yo Exit
 The Yo Yo Exit is similar to the
Chandelier Exit except the Yo Yo Exit
hangs down from the most recent close.
 The Yo Yo Exit moves up and down
with the closing prices. (Hence the
name.)
The Modified Parabolic Exit
 This trailing stop moves closer and closer to
recent price as new highs are made.
 ADX - Parabolic “V” Pattern
 Wait until ADX is above both Plus DI and
Minus DI, then expect reversal.
 Reversal is signaled by crossing of
Parabolic SAR point.
 A powerful change of direction is expected.
 Works especially well in indexes.
 Practical applications of
ADX for exits

 When ADX is rising - Be patient and look

for big profits.
 When ADX is falling - Be cautious and take
profits quickly before they get away.
 Other exits to consider
 Trailing channel exits at lowest low in X
days.
 Moving average exits (Try 10 to 20 days in
futures, 30 to 50 days in stocks)
 Entry signal in opposite direction
 Time Exit - Exit after N bars (Good for
testing)
 Profit targets (Use ADX and ATR)
 High RSI - exit on strength - try 70 or 75
 The ATR Ratchet - New
1. Ratchet factor - Select small unit of ATR - example: 0.05

2. Ratchet trigger - Select when to implement - example: as soon as

profit reaches 2 ATRs

3. Low point - Select starting point - example: lowest low of last 10

days.

4. Multiplier - Keep track of number of bars since entry

5. Calculation - Multiply ATR factor times number of bars in trade

and add to low point.
Example: When we get to two ATRs of profit we see that we have been in the
trade for ten days.We multiply .05 times 10 and then add 0.50 units of ATR to
the lowest low of the last ten days. This is our exit stop. The stop will rise .05
ATRs each day we are in the trade.
Logic behind the ATR Ratchet
1. It does not operate until some profit objective has been reached.

2. It relates the exit to the amount of time in the trade. It expects some
unit of profit for each day we hold the trade.

3. As the market moves up, the starting point (10 day low) will rise.
Since the starting point is rising and the bars since entry is increasing
we have two factors that are accelerating the exit point to lock in profits.

4. Very often near the top of the market the volatility will expand. The
expansion of the ATR multiplied by the number of bars in the trade causes
the Ratchet exit to leap upward in a timely fashion to lock in profits very
near the top of the move.

5. It is a very flexible strategy that can be tailored to specific needs.

A quick look at the variables
1. The size of the unit of ATR can be controlled. Use small units to hold longer,
larger units to exit faster.
2. The profit point used to implement the exit can be controlled. We could also
implement the exit based on time instead of amount of open profit. For example
we may chose to implement the exit after the trade has been open for twenty days.
This would implement the exit whether the trade was a profit or not.
3. The point to which we add the ATR units can be varied. We can use the 10
day low, the 20 day low, the trade entry point, the low point of the open trade, a
pivot point, a moving average or any other logical starting point.
SUMMARY: The ATR Ratchet gives us a great deal of control over the
calculation of our exit point. It relates the exit to the amount of time spent in the
trade which will help us to maximize our return per bar in the market. The exit is
very sensitive to any increase in volatility and moves up very quickly to reduce
risk and protect profits.
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