Average True Range does not care about direction at all, and that is exactly what makes it useful. ATR answers one question only: on average, how much does this instrument actually move in a given period? Everything else, where a stop belongs, how far a target should sit, how big a position should be, follows from that single number once you stop guessing and start measuring.
What ATR actually calculates
True range for a single candle is the largest of three measurements: the current high minus the current low, the current high minus the prior close, or the prior close minus the current low. That last two account for gaps a simple high-minus-low would miss. ATR is a moving average of true range, usually over 14 periods. A 14-period ATR of 12 pips on a EURUSD 5-minute chart means the pair has, on average, traveled 12 pips of true range per 5-minute candle recently. It is a measured fact about recent behavior, not an opinion.
Sizing stops from measured volatility, not a fixed number
A stop that is the same 10 pips whether EURUSD's ATR is 8 or 20 is a stop set by habit, not by the market. A common, defensible approach: place the stop at 1 to 1.5 times the current ATR beyond the entry structure. If the 14-period ATR on a EURUSD 5-minute chart is 10 pips, a stop 12 to 15 pips beyond entry gives the trade room to breathe through normal noise without being so wide it ignores the chart entirely. When ATR expands, during a strong trend day or right after news, stops should widen with it; when ATR contracts into a quiet range, stops should tighten. A fixed stop distance is really a decision to be too tight in fast markets and too loose in slow ones, on alternating days, by accident.
Sizing targets and position size from the same number
Targets scale the same way: a common rule of thumb is aiming for 1.5 to 2 times ATR as a first target, giving a reward roughly proportional to the risk taken and to what the instrument can realistically deliver in the timeframe being traded. Position size then plugs straight into the one percent rule: risk budget divided by stop distance, now expressed in ATR, times the value per unit. On a $10,000 account with a 1 percent, $100 risk budget, an ATR-based EURUSD stop of 15 pips at $10 per pip per standard lot gives $100 divided by 150, or roughly 0.66 lots. Change the ATR and every other number in that sentence changes correctly and automatically.
A worked comparison across two regimes
Gold's 14-period ATR sitting near $3.50 during a quiet Asia session justifies a stop around $4 to $5 and a target near $6 to $7. The same instrument during a volatile New York session, ATR expanding to $7, needs a stop closer to $8 to $10 and a target around $12 to $14, with position size shrinking correspondingly to keep the dollar risk fixed at 1 percent. A trader using a flat $5 stop on gold in both sessions is unknowingly risking far less than intended in the quiet session and getting stopped out constantly by normal noise in the volatile one.