ATR (Average True Range)

ATR measures the average size of an asset's daily price swings over a set lookback period. Each day's true range takes the largest of three values: the day's high minus its low, the high minus the prior close, or the prior close minus the low, which captures gap moves that a simple high-minus-low calculation would miss. Those daily true ranges are then averaged over the lookback window, commonly 14 or 30 days, to produce a single number in the asset's own price units.

A rising ATR means an asset's typical daily move is getting larger, whether that's from genuine news-driven volatility or simply choppier conditions; a falling ATR means moves are compressing. Traders use it to size positions, risking a consistent multiple of ATR rather than a fixed dollar or pip amount regardless of current volatility, and to set stop-losses and targets that are realistic for how much the asset actually moves in a day, rather than arbitrary round numbers that get hit by normal noise.

ATR describes typical movement, not direction. A currency pair with a large ATR is equally likely to have that range spent trending or chopping sideways, and the figure alone can't distinguish the two. It's also backward-looking by construction, an average of recent history, so it can understate the range right before a volatility spike, like a surprise rate decision, and overstate it in the quiet days right after one as the elevated readings roll out of the lookback window. And ATR is asset-specific: comparing the raw ATR of two different currency pairs directly is misleading unless it's normalized against each pair's own typical price level.

Suppose EURUSD has a 30-day ATR of 0.0072, about 72 pips, while trading near 1.0850. A trader targeting a 100-pip move on a single day is asking for roughly 1.4 times the pair's typical recent range, a stretch goal rather than a base case. Compare that to a period where the same pair's ATR has expanded to 0.0110, 110 pips, following a stretch of central bank surprises. That same 100-pip target now sits comfortably within a typical day's range, which is why a stop-loss or target set as a fixed pip amount without checking current ATR can end up either far too tight or unnecessarily loose depending on which volatility regime the pair is in.