Chande Kroll Stop – Rules, Setting, Strategy, Returns
In the fast-paced world of financial markets, it is important to have a reliable way to limit your risk in the market to protect your capital — one tool that can be useful in this regard is the Chande Kroll Stop indicator. What do you know about this indicator?
The Chande Kroll Stop indicator is a tool traders can use to estimate the level at which they place their stop-loss orders. It consists of 2 lines that follow below the price in an uptrend or above the price in a downtrend. The lower line may indicate an optimal stop-loss level for a long position, while the upper line may indicate an optimal stop-loss level for a short position.
In this post, we will take a look at most of the questions you may have about the Chande Kroll Stop indicator: what it is, how it works, and how you can improve your trading strategies with it. Let’s dive in!
Key takeaways
- The Chande Kroll Stop indicator helps traders set stop-loss levels to limit losses.It consists of two lines that track price action: below the price in an uptrend and above the price in a downtrend.
- The gap between the two lines is based on volatility, measured by the average true range (ATR).
- The lower line serves as a suggested stop-loss level for long positions, while the upper line does so for short positions.
- Useful across various markets (stocks, forex, commodities, derivatives), it assists traders in managing risk.
- The stop-loss size adjusts with volatility, increasing in high volatility and decreasing in low volatility, helping traders protect capital.
- QuantifiedStrategies.com backtests a trading strategy, including the Chande Kroll Stop indicator.
- More indicators are available if you click here: best trading indicators.
What is the Chande Kroll Stop indicator?
The Chande Kroll Stop indicator is a tool traders can use to estimate the level at which they place their stop-loss orders. A stop-loss order is a buy or sell stop order in the market that traders use to stop their loss when the price reaches a certain point against their positions so as to protect their capital.
It consists of 2 lines that follow the price action — usually below the price in an uptrend or above the price in a downtrend. The gap between both lines is determined by the level of volatility in the instrument, as measured by the average true range (ATR). The lower line may indicate an optimal stop-loss level for a long position, while the upper line may indicate an optimal stop-loss level for a short position.
Useful for any financial market — stocks, commodities, forex, and derivatives — the indicator was created to help trader limit their trading risks when in the market. It combines the price levels and market volatility using ATR to suggest the appropriate levels for stop-loss orders.
Since it is based on market volatility, the stop-loss size will be larger when market volatility is high and smaller when market volatility is lower. This way, traders are assured of optimal stop loss to limit their losses if the market goes against their positions.
An example of what the Chande Kroll Stops might look like on a chart is shown here:
The blue line is the stop for short trades, while the red line is the stop for long trades.
Chande Kroll trading strategy – rules, settings, and returns
Let’s backtest a trading strategy that has the Chande Kroll Stop included and has the following trading rules:
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The trading rules are simple but still effective.
First, we backtest using no stops whatsoever on SMH, the ETF that tracks semiconductors from its inception until today:
Trading performance metrics and statistics from inception until today:
- Number of trades: 288
- Average gain per trade: 0.9%
- Annual returns: 10.5%
- Win rate: 68%
- Time spent in the market: 19%
- Risk-adjusted return: 55%
- Max drawdown: 29%
The results are pretty good.
Let’s backtest the same trading strategy and rules and include the Chande Kroll Stop. We use the default lookback period of 10 days for the stop. This is what the equity curve looks like when using the stop:
Trading statistics with the stop:
- Number of trades: 309
- Average gain per trade: 0.75%
- Annual returns: 9.2%
- Win rate: 67%
- Time spent in the market: 18%
- Risk-adjusted return: 50%
- Max drawdown: 29%
As you can see, the strategy performs worse on all parameters. This aligns with what we have written before: most trading strategies perform worse with a stop loss. Please read our take on the pros and cons of using a stop loss.
This is the code we used for the backtest (Amibroker):
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Who created the Chande Kroll Stop indicator?
Tushar Chande and Stanley Kroll, two renowned Canadian traders and technical analysts, created the Chande Kroll Stop indicator in the early 1990s. They introduced the indicator to the trading community in the book titled, “The New Technical Trader: Boost Your Profit by Plugging into the Latest Indicators”, which was first published in 1994.
A well-known trading system wizard, Tushar Chande is also responsible for developing other indicators, such as the Chande Momentum Oscillator, VIDYA, and Aroon Indicator. Stanley Kroll is a renowned money management expert known for his numerous books about the futures market. Together, Chande and Kroll are responsible for introducing other indicators, such as the stochastic RSI.
How does the Chande Kroll Stop work?
The Chande Kroll Stop works as a price-following band that can help traders spot the right level for their stop-loss or trailing stop-loss orders. It uses directional price swing high or low and the average true range of the instrument to plot two lines. The average true range measures the level of volatility which helps determine where the lines are plotted.
The two lines follow the price action. When the price is in an uptrend, the lines tend to follow below the price action, and the lower line is often seen as an appropriate stop-loss level for a long position. When the market is in a downtrend, the lines tend to follow above the price action, and the upper line may indicate an optimal stop-loss level for a short position.
In a sideways market, the lines may crisscross but quickly separate once the price establishes a trend direction. The space between both lines is determined by the level of volatility in the instrument, as measured by the average true range.
Traders can use the indicator to know where to place their initial stop-loss order and to guide their trailing stop if they want to ride the trend to its conclusion — below the lower line for a long position and above the upper line for a short position.
What are the key components of the Chande Kroll Stop?
The key components of the Chande Kroll Stop are as follows:
- The long stop line: This is the lower line of the two lines in the Chande Kroll Stop indicator. It is derived from the lowest low over the chosen period. This line can be used to guide the position of a stop loss or trailing stop for a long position taken in an uptrend.
- The short stop line: It is the upper one of the two lines in the Chande Kroll Stop indicator, and it is derived from the lowest low over the chosen period. The line can be used to guide the position of a stop loss or trailing stop for a short position taken in a downtrend.
How is the Chande Kroll Stop calculated?
The Chande Kroll Stop is calculated using the following steps:
Step 1: Calculate the initial high and low stops as follows:
Initial high stop = HIGHEST [p] (high) — x * Average True Range [p]
Initial low stop = LOWEST [p] (low) + x * Average True Range [p]
Where:
X refers to the ATR multiplier and is 1 by default.
[p] is the lookback period and usually 10 by default. Thus, the HIGHEST [p] (high) is the highest high over the lookback period, while the LOWEST [p] (low) is the lowest low over the period. Average True Range [p] is the ATR over that period.
Step 2: Calculate the long stop and short stop as follows:
Long stop = LOWEST [q] (Initial low stop)
Short stop = HIGHEST [q] (Initial high stop)
Where:
[q] = the lookback period for updating the indicator lines.
How do you interpret the Chande Kroll Stop signals?
To interpret the Chande Kroll Stop signals, you have to understand what the indicator is used for. Although it may be used for a breakout trend-following entry strategy signal, the Chande Kroll Stop indicator is primarily used to spot the appropriate level for a stop-loss order or guide a trailing stop when riding a trend.
The indicator consists of two lines — an upper line or the short stop and a lower line or the long stop. As the names imply, the upper line is used to guide the stop loss for a short position — the stop-loss order is placed above this line. Likewise, the lower line is used to guide the stop loss for a long position — the stop-loss order is placed below this line.
What is the purpose of the Chande Kroll Stop in trading?
The purpose of the Chande Kroll Stop in trading is to identify the potential stop loss levels for different position types. It can show the right level for a stop loss in a short position and the appropriate level for a stop loss in a long position.
And not just the initial stop-loss positions, the indicator lines can guide the position of a trailing stop when riding a trending market. The stop loss for a long position can trail below the lower line, while that of a short position can trail above the upper line.
When should you use the Chande Kroll Stop?
You can use the Chande Kroll Stop indicator when trading in a trending market. It can guide your stop loss for a breakout trade or swing continuation trades, where you put a safe initial stop-loss order and practice set and forget.
However, the indicator is more useful when trading a trend-following strategy where you intend to ride the trend to its conclusion. In this case, you can use it as a guide for your trailing stop order — for a long trade, you trail your stop below the lower line until the uptrend is over, and for a short position, your stop trails above the upper line until the downtrend is over.
How do you set up the Chande Kroll Stop on a chart?
To set up the Chande Kroll Stop on a chart, you check the indicator section of your trading platform to know if the indicator is preinstalled; if not, you have to get a custom version for the platform and install it first.
Then, you can double-click on the indicator or click and drag it to the chart. A settings box may pop up for you to input your preferred settings.
While you can input whatever settings you think may work best for the market and strategy you are trading, it is best to backtest to know what works and what does not.
What are the default settings for the Chande Kroll Stop?
The default settings for the Chande Kroll Stop may differ from platform to platform. On the TradingView platform, the default settings are 10 for the ATR [p], 1 for the ATR multiplier (X), and 9 for the Stop lines lookback period [q], as you can see in the chart above.
These settings were either chosen by the authors or arbitrarily chosen. They may not work for all markets and strategies — they may not even work for any market at all. It is your job to experiment with different settings and backtest to find the best settings for the market and strategy you are trading.
Can you adjust the Chande Kroll Stop settings?
Yes, you can adjust the Chande Kroll Stop settings to suit your trading strategy, the asset you are trading, and the prevailing market conditions at any point in time. You may start by inputting whatever settings you think may work best for the market and strategy you are trading, but you have to backtest and experiment with other settings to find what actually works.
Even after the backtesting, you should evaluate your trading results from time to time to know when you need to adjust your settings due to changing market conditions.
How does the Chande Kroll Stop help manage risk?
The Chande Kroll Stop helps manage risk by showing you the appropriate levels to place your stop-loss orders. It can show the right level for the initial stop loss and also guide the trailing stop in a trending market. Whether you practice the set-and-forget strategy or trail your profits, you can find the indicator a helpful tool to manage risk.
By showing you where the stop-loss level would be, it helps you to calculate your position size using your planned risk for the trade.
What types of assets can the Chande Kroll Stop be applied to?
The Chande Kroll Stop can be applied to any type of financial asset since the indicator is based solely on the price data and all assets post such data. It is unlike volume-based indicators that cannot be applied to certain markets, such as the spot forex market, where volume data is unreliable.
The Chande Kroll Stop indicator uses only the price data and as such, can be applied to all assets, including forex, cryptos, stocks, bonds, and commodities.
How does the Chande Kroll Stop perform in trending markets?
The Chande Kroll Stop performs well in trending markets, as it not only shows the right levels for the initial stop loss order but can also guide the trailing stop for those wishing to ride the trend till the end. In trending markets, the price tends to move predominantly in one direction, with minor pullbacks in the opposite direction.
So, a stop-loss indicator, like the Chande Kroll Stop, is more likely to work better in such market conditions.
Can the Chande Kroll Stop be used in sideways markets?
Yes, the Chande Kroll Stop can be used in sideways markets, but it depends on the nature of the sideways market — and, it may not work so well too. If the market is bound within a sizeable range and trades between two key levels, the Chande Kroll Stop may be used to find an initial stop loss at one end of the range.
This may work for a set-and-forget strategy. If the market is in a tight consolidation, the indicator should not be used until after a valid breakout has happened.
How do you combine the Chande Kroll Stop with other indicators?
To combine the Chande Kroll Stop with other indicators, you have to create a reliable trading strategy that uses other indicators for market entry while using the Chande Kroll Stop for stop-loss orders.
The indicators to combine with will depend on the trading strategy — momentum oscillators can serve as entry points for trading price swings, while moving averages are good for trend-following strategies.
What is the difference between the Chande Kroll Stop and a moving average?
The difference between the Chande Kroll Stop and a moving average is that the former is a volatility indicator that can guide the placement of a stop-loss order, whereas the latter tries to find the average price over a given period and uses it to estimate the direction of the price trend.
Thus, traders use a moving average to find the trend direction and the Chande Kroll Stop to guide their stop-loss levels.
How does the Chande Kroll Stop compare to other stop-loss indicators?
The Chande Kroll Stop compares favorably to other stop-loss indicators, such as ATR, and standard deviation because it shows two visible lines that follow the price, which can provide an easy guide for stop-loss levels.
Its lower line is a good estimate for the stop loss for a long position, while the upper line provides a good level for stop loss in a short position.
What are the advantages of using the Chande Kroll Stop?
The advantages of using the Chande Kroll Stop include the following:
- It can easily show an appropriate level for a stop-loss order whether it is a long or short position.
- It is dynamic and adapts to the price moves, which makes it very useful for guiding a trailing stop order.
- It considers market volatility and, as such, can show the stop-loss levels that are suitable for the prevailing market condition.
Are there any limitations of the Chande Kroll Stop?
Yes, there are limitations of the Chande Kroll Stop, and these are some of them:
- Depending on the lookback periods, the indicator can be very sensitive to price movements, which can lead to getting stopped out prematurely.
- It does not work so well in markets that are in tight consolidations until after a valid breakout from the consolidation.
- It generally cannot be used to find entry points unless combined with other indicators or analysis tools.
How can the Chande Kroll Stop prevent premature exits in trades?
The Chande Kroll Stop can prevent premature exits in trades if used in the right market condition, especially in a trending market. When using a trend-following strategy, you can use the indicator to trail your profits so you can ride the trend to its end. This way, you can avoid exiting prematurely.
What timeframe is best for using the Chande Kroll Stop?
The best timeframe for using the Chande Kroll Stop will depend on your trading style and the result of your backtesting. If you are a day trader, the hourly, 30-minute, and 15-minute timeframes would be your options. For a swing trader, the 4-hourly and daily timeframes are the common options. However, it is your backtesting result that will tell you the best timeframe for your trading style.
Can you use the Chande Kroll Stop in automated trading systems?
Yes, you can use the Chande Kroll Stop in automated trading systems if you can create a reliable strategy that uses the indicator to spot the appropriate stop-loss levels, as well as guide your trailing stop.
For a trend-following strategy, even if the entry is manual, it is easy to get an automated system that uses the indicator to guide your trailing stop.
How does the Chande Kroll Stop adapt to market volatility?
The Chande Kroll Stop adapts to market volatility by using the average true range to estimate the market volatility at any point in time. In the indicator’s calculation, the ATR and a multiplier are included.
These determine how well the indicator adapts to changes in market volatility — when volatility is high, the gap between the two indicator lines widens, and when volatility is low, the gap narrows.
What are common mistakes when using the Chande Kroll Stop?
The common mistakes when using the Chande Kroll Stop include:
- Using the indicator as a standalone strategy for an entry signal
- Not considering the market condition before using the indicator
- Using the indicator to trail profit in a sideways market
Chande Kroll Stop vs Chandelier Exit
The Chande Kroll Stop can be seen as an enhancement of the Chandelier Stop. While the Chandelier Exit provides only “stop and reverse” signals—switching between long and short positions—the Chande Kroll Stop offers additional flexibility. Notably, the area between the stop lines can be used to differentiate between trending and sideways market conditions.
To compare the Chande Kroll Stop with the Chandelier Exit, align their ATR settings. For the Chandelier Stop, ensure the “Donchian anchor” is activated and the “trailing stop” feature is disabled. A long stop is calculated by subtracting an ATR multiple from the highest high within the lookback period, while a short stop is determined by adding an ATR multiple to the lowest low. This method mirrors the initial step in the Chande Kroll Stop calculation.
This similarity becomes apparent when overlaying the Chande Kroll Stop. By setting the ATR formula to “Wilder”—the same calculation used by the Chandelier Stop—and choosing a reference period of “1,” the second step of the Chande Kroll Stop calculation is bypassed, effectively making it identical to the Chandelier Stop.