The Average True Range (ATR) measures how much an instrument typically moves per candle, usually averaged over 14 periods. It does not tell you direction; it tells you how much.

True range

For each candle, the true range is the largest of:

1. high minus low,
2. the distance from the previous close to the high,
3. the distance from the previous close to the low.

Including the previous close captures gaps. ATR is the average of those values.

Why it matters for stops

A 15-pip stop on EUR/USD may be sensible when the hourly ATR is 8 pips, and reckless when it is 30 pips after a central bank decision. Stops tighter than normal noise get hit by random movement.

A common approach is to place stops 1.5 to 2 ATR away from entry, beyond the nearest structure.

ATR and position size

Volatility-based stops keep your risk in money constant, even as markets get quieter or wilder:

1. Stop distance = 2 × ATR, say 2 × 20 = 40 pips.
2. Risk per trade = $500.
3. Position = $500 ÷ (40 pips × $10) = 1.25 lots.

When volatility doubles, the stop widens and the position shrinks automatically. That is exactly what you want.