Most traders set stop losses at arbitrary levels — a round number, a fixed percentage, or wherever they feel comfortable. The problem is that markets don't move in fixed percentages. A 2% move means nothing to Bitcoin but is enormous for a stablecoin. Average True Range (ATR) solves this by measuring how much an asset actually moves.
ATR was developed by J. Welles Wilder and published in his 1978 book New Concepts in Technical Trading Systems — the same book that introduced RSI and Parabolic SAR. It remains one of the most practical indicators ever created because it adapts stops to actual market conditions.
ATR doesn't measure direction — only volatility. It calculates the average "true range" of each candle over a lookback period, where the true range accounts for gaps by taking the largest of:
The result is a single number in price terms. If Bitcoin's ATR(14) on the 1h chart is $500, it means BTC has been moving about $500 per candle on average. A stop placed tighter than that will get hit by normal price noise.
The most common approach is the ATR multiplier method: place your stop at a multiple of ATR away from your entry. Common multipliers:
Entry: $67,400 | ATR(14): $420 | Multiplier: 1.5×
Stop loss = $67,400 − (1.5 × $420) = $67,400 − $630 = $66,770
Take profit at 2:1 R:R = $67,400 + $1,260 = $68,660
ATR-based stops lead naturally to ATR-based position sizing. If you know your maximum risk per trade (e.g. 1% of account) and your stop distance in dollars, position size follows:
This ensures you risk the same dollar amount regardless of which market you're trading or how volatile it is that week. A BTC trade and a SOL trade both risk exactly 1% of your account even though their ATR values are vastly different.
ATR is also useful for filtering out low-quality setups. In low-volatility conditions (ATR contracting toward recent lows), breakout signals tend to be false — price doesn't have enough energy to follow through. Strategies that only take entries when ATR is above its 20-period average perform significantly better on average than those that trade through all conditions.
The Strategester approach: The backtest engine uses ATR-based trailing stops that only activate once a trade has moved 50% toward the take-profit target. This prevents the trailing stop from competing with the take-profit on small moves while still locking in profit on larger runs.
ATR values scale with the timeframe. A 5m ATR and a 1h ATR for the same asset will be very different numbers. Always use the ATR from the same timeframe as your trade. If you're swing trading on the 4h chart, your stop and position size should be based on the 4h ATR, not the 1h.
The Strategester Mix & Backtest engine lets you set stop loss and take profit as percentages and tests them against 90 days of real Bybit candle data.
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