Chande Kroll Stop
The Chande Kroll Stop indicator offers trading information in real-time depending on the market volatility. The indicator helps traders amend their trading position while it is still open.
For instance, if a trader has a short position on stock X while the price is under both lines, they can end their short position early. It acts as a confirmation that the price is moving in the right direction.
The Chande Kroll Stop
The Chande Kroll Stop indicator was developed by two technical analysts, Tushar Chande and Stanley Kroll. They introduced their indicator in 1994 in the book “The New Technical Trader – Boost Your Profit by Plugging into the Latest Indicators.” The book was a best-seller and has had significant influence over trading practices.
Chande and Kroll are financial sector veterans responsible for introducing popular indicators like the StochRSI, Chande Momentum Oscillator, Aroon, and VIDYA. All of these indicators have been tested for almost 30 years and are commonly used in shares, commodities, and even cryptocurrency trading.
You can read about Stochastic RSI and Stochastic Divergence indicator here.
It is a trend following indicator that helps traders identify protective stop points based on the calculation of the average true volatility range of the markets.
Using indicators helps traders place their long and short trades based on the barriers they indicate. Protective tools like stop-losses help traders manage their trading points.
If a trader opens a long trade, the indicator helps them to go long when the price drops under the two lines. Similarly, they can shorten their positions when the price exceeds the two lines.
The formula for the Chande Kroll StopThe Chande Kroll Stop formula derives stop points for high and low ranges. These are then compared with average stop losses.
High Stop = Highest (N) x * Average True Range(N)
Low Stop = Lowest (N) + x * Average True Range(N)
The formula doesn't require manual calculation as most trading platforms offer the indicator in the list of indicators.
Instead, traders just need to adjust three variables, usually denoted by P, Q, and X.
"P" represents the Average True Range, which is the average range for stop losses based on volatility. The default is usually 10, 10 days for the daily charts and ten weeks for the weekly charts.
“Q” shows the lines from the market price. The Q variable is fixed by default at a value of 9, which makes it nine times higher than the volatility level.
The “X” shows the average time, which is by default fixed at 1 to show one day.
Applying The Chande Kroll Stop
Traders can change the Chande Kroll Stop parameters P, Q, and X based on their trading preferences.
Make your chart by deciding which instrument you want to trade at which time frames. Select the Chande Kroll Stop from where the list of indicators is available. Add the indicator to your chart. The indicator has two lines, a green or blue line, also known as the long stop line, and a red line showing the shortstop line
The two indicator lines track the instrument price and help identify the ideal stop loss levels so traders can physically place or change their trailing stop loss. As a result, the indicator can suit many traders as you can use it to trade any instrument at any time.
In rising (bullish) markets, the stop point is the uppermost point of the blue line. The indicator line tracks the trend and stagnates when the value falls.
In a falling (bearish) market, the lowest point touched by the red line is used as the stop loss. When the price rises, the indicators stay fixed.
The blue line intersecting the red line from below is taken as a buy signal as it shows a possible upcoming rising trend. Similarly, the red line crossing the blue line from above is seen as a sell signal.
In both these cases, the price should be over the trend line during an upwards trend and under the trend line in a downwards direction.
This shows that while the Chande Kroll Stop is mainly said to protect trade profits, it can also identify the best entry and exit points for trades.
Strategies for Using The Chande Kroll Stop
A safe Chande Kroll Stop strategy is to place trades when the asset price is under or over both indicator lines. It is usually advisable to trade long-term charts like the 1W or 1M to ascertain the trend.
The indicator works on charts with shorter time frames like the 12H or 6H, but it won’t be as detailed and accurate as the 1W chart.
The chart above shows prices for the Euro against the US dollar. The blue line intersects the red line from above, showing a buy signal. The hope is prices go upwards after this signal, and if the price remains above the blue line, it becomes a stop loss point.
When the uptrend ends, the indicator line remains flat as it stagnates. Ultimately, the red line intersects the blue line showing a sell signal. The price is moving down below the red line, acting as a stop loss, so this is a suitable sell signal
The Chande Kroll Stop indicator is an easy-to-use indicator that displays two clear lines in red and green/blue, showing the analytical resistance levels for the upside and support levels for the downside that the entire market is trading on.
The main benefit of this indicator is that exchanges use almost identical calculations to estimate automatic stop-loss and take profits points for traders.
This means that any trader applying this indicator should get the exact same information that an exchange has, as it offers insights into where market stop losses and profit-taking points are.
Using the Chande Kroll Stop with other indicators is always advisable for optimum results and some level of risk management. For example, using the Moving Average (MA) and Relative Strength Index (RSI) can help confirm trading decisions.
The indicator is predictable and helpful in placing stop loss and trailing stops to make the most out of trades. It is advisable to practice with the indicator on your platform’s dummy trading with changing time frames to learn how it works and how you can apply it in a real market scenario. Traders need to know how and when the red and blue lines cross on each chart and how that impacts the price action.
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