Chande Kroll Stop

The Chande Kroll Stop is a technical indicator identifying potential stop-loss levels for investors to mitigate risk in their investments. It can be applied to long and short positions. It also provides real-time market-based volatility, thereby aiding in mitigating risk and helping traders make informed decisions.

The indicator uses directional movement fluctuations and is determined by the average true range of an asset’s volatility. A stop loss allows investors to stop their loss at a certain point. When an investor employs optimal stop loss using this indicator, it helps them protect their capital.

• Chande Kroll Stop is a technical indicator to spot potential stop loss levels for investors to help them protect their capital in both long and short positions.
• The indicator works on a candlestick price pattern using two lines, each showcasing the stop loss levels for long and short positions.
• It is helpful in every asset type, from commodities, securities, currencies, derivatives, and financial markets.
• It places the stop-loss above or below the current price. Meanwhile, the Chandelier Exit places the stop level below or above the highest high over a specified period.

The Chande Kroll stop strategy is a technical indicator to spot stop loss levels, and based on that, a trader can apply optimal stop loss to their long and short positions, protecting their capital and mitigating risk in the stock market. A stop loss is simply a cap or limit set by a trader so that if the market price reaches that exact point, the associated order automatically gets executed, ensuring that a loss has been reverted.

This indicator was introduced by Tushar Chande and Stanley Kroll, two Canadian bankers, and technical analysts; they first mentioned it in the book The New Technical Trader: Boost Your Profit by Plugging into the Latest Indicators, which came out in 1994. They are also responsible for engineering other indicators like the Chande Momentum Oscillator, VIDYA, and Aroon Indicator.

The Chande Kroll stop indicator is displayed on candlestick charts with two lines plotted on the price data. The red line represents the stop loss for short positions, whereas the other line (either blue or green) indicates the stop loss for long positions. The gap between both lines is derived from the underlying security's volatility using the average true range. The indicator can be used in stocks, currencies, derivatives, and commodities. It is an essential strategy because it protects the capital and ensures that trades remain open when they move in the preferred direction.

Its formula determines stops for the high and low points of the option graph. Valid range is considered the absolute value, and there are three values included below it -

• Current bar low: last close bar
• Current bar high: last close bar
• Current bar high: current bar low

The stops are aligned on the peak and bottom of the chart's last 'n' bars, and the gap is associated with the average accurate range on 'n' bars, and the values are taken into account accordingly.

The formula -

• Initial high stop = HIGHEST (high) – x * Average True Range
• Initial low stop = LOWEST (low) + x * Average True Range
• Shortstop = HIGHEST (Initial high stop)
• Long stop = LOWEST (Initial low stop)

Here are two examples of this indicator for better understanding:

Example #1

Suppose Jennifer is a new investor, but she is more interested in cryptocurrency than stock market investments. She is ready to invest in a new crypto coin but is worried about its high volatility. She also fears a massive loss in the crypto market. Jennifer finally decides to use the Chande Kroll stop; she studies the historical patterns of the coin price movement through candlestick charts and deduces a stop loss value by calculating it through its formula.

Now, this helped Jennifer protect her investment, and at the same time, in case she cannot monitor daily and the price declines and touches the stop loss value, the exit order will get executed, saving Jennifer from an enormous loss.

Example #2

In May 2023, Aurelian Ohayon, a famous crypto analyst, was standing firm, predicting a bull run for Bitcoin. The analyst used his Twitter handle to inform his followers that the double exponential moving average (DEMA) was crossing above the weekly median high and low. It has been a reliable indicator for an uptrend beginning, and Bitcoin bull runs.

To support his analysis, Aurelian combined the Chande Kroll stop setting to determine Bitcoin's volatility and express the potential entry points. He claimed that the indicator signaled a Bitcoin bull run in the foreseeable future. According to him, the historic bull run will begin when the BTC hits its weekly stops of 40, 1, and 16. He also believes that Bitcoin followed the same price action post-Covid crash.

There are various ways to use this indicator. Some of them are mentioned below:

• Spotting buying or selling signals - A buy signal is generated when the underlying asset price goes above both long and short lines, referring to a potential bullish trend. Likewise, if the price declines below both lines, it showcases a sell signal.

• Monitoring and adjusting stops - A trader can adjust their stop loss levels. The Chande Kroll line also moves along with the price and will indicate the market variation, and the traders have to spot the opportunities to lock in profits by readjusting and updating their stop loss orders.

• Trend reversal detection - When the long stop line (blue or green) crosses the short stop line (red), it showcases a potential uptrend. Conversely, when the red line crosses the green or blue line, it refers to the beginning of a downtrend. Traders can monitor these crossovers and gain valuable insights, which they can implement on their orders accordingly.

The concept is explained in a very systematic manner in the chart taken from TradingView, given below. In the chart the lines of the indicators are drawn clearly, where the red line represents the stop loss prices that the traders should consider for short trading and the blue line shows the stop loss levels that the trader should consider while taking a long position. The volatility of the stock prices separates these two lines.

Thus, these two lines are ideal in pointing out the stop loss levels to the trader, which is extremely important in order to avoid or minimise losses during trading, especially in volatile markets. The trader will get the chance to change their stop loss levels as per changes in the market conditions. This will allow them to lock profits and derive maximum gains from the market by following their strategy. However, the indicator also detects trend reversal. When the red line crosses the blue one, it may lead to a downtrend and if the blue line crosses the red, it may show an uptrend in the near future.

Therefore, it is ideal for identifying stop loss positions so as to ensure capital protection from price fluctuations. But it is advisable to use it in combination with other indicators to get clear confirmation and trade accordingly.

Source

Both Chande Kroll Stop and Chandelier Exit indicators are technical and are used to determine the stop-loss levels. Some of the significant ones are given below:

This has been a guide to what is Chande Kroll Stop. Here, we explain its formula, comparison with Chandelier exit, how to use it, and examples. You can learn more about financing from the following articles –

• Advanced Technical Analysis
• Fundamental Analysis vs Technical Analysis
• Technical Analysis Books