Volatility, ATR and clusters
Place stops by how much the market moves, and size accordingly. · 5 min
Average True Range (ATR) is the typical size of a candle, counting gaps. True range is the largest of high − low, |high − previous close| and |low − previous close|; ATR(14) smooths it over 14 candles.
Stops closer than about one ATR sit inside ordinary noise and get hit by chance. Placing the stop at, say, 2 × ATR and then sizing from that distance keeps the money at risk constant while the market's mood changes:
stop distance = k × ATR · units = risk budget ÷ (k × ATR)
Volatility clusters: big candles follow big candles. Real markets alternate between calm stretches and storms, which the simulator reproduces with a GARCH model and regime switches. When ATR doubles, a volatility-sized position halves.