Chande Kroll Stop

Definition

The Chande Kroll Stop indicator is a stop for either a short or long position. It presents itself as a red and green (sometimes blue) line that is overlaid on the price chart. The red line represents the stop level for a short position, whereas the green line represents the stop level for a long position. The Chande Kroll Stop is calculated on the true range and therefore is labeled as independent from the volatility of the instruments involved.

History 

The Chande Kroll Stop indicator was first discussed and later implemented in “The New Technical Trader,” written by Tushar Chande and Stanely Kroll. Established as a trend-following indicator, the Chande Kroll Stop identifies a trader’s stop by calculating the average true range of the market trend, cataloguing any market volatility in the process.

Calculations

The stop indicator is calculated on the average true range of an instrument’s volatility in connection with market trends. Stops are placed under / on the high and low of the last “n” bars on the chart. The difference is proportional to the average true range on “n” bars and the resulting values are used accordingly.

Takeaways

Keep in mind that the true range is the highest in absolute value for the three values shown below:

1. Current bar high — current bar low;
2. Current bar high — previous bar close;
3. Current bar low — previous bar close.

What to look for

The Chande Kroll Stop can be used in a variety of ways. It is common to sell when the price crosses below both lines, whereas it is common to buy when the price crosses above both lines. Moreover, it is recommended to trade when the two lines cross each other in some way.

The lines of the Chande Kroll Stop begin to flatten out as the price moves sideways and this, in turn, allows for price to trade more broadly between both lines. Being aware of the line position is key to placing a successful trade, and traders should make sure to trade in the direction of the market trend.

The Chande Kroll Stop can also be used to stop trend changes. When the green/blue line crosses above the red line, a new uptrend is highlighted. When the red line crosses below the green/blue line, a new downtrend is highlighted.

Summary

The Chande Kroll Stop indicator is a stop that consists of two lines that overlay on the price chart. It is created by taking the true averages over a specific period of time in order to stop trade losses to a point where they would be volatile to the market and where the market trend would be most likely to switch in direction.