What is average true range?

What it means

True range is the largest of three values — the current bar's high-low, and the distance from each of those to the previous close — which makes it robust to gaps. Averaged, it gives a volatility figure in the instrument's own price units rather than a normalised index.

Why it matters

That unit choice makes ATR the most directly useful indicator for risk. A stop of one and a half ATR is a stop scaled to current conditions, so the same rule produces a wide stop in a volatile week and a tight one in a quiet week without any intervention.

What this changes in practice

On gold this is not optional. XAUUSD volatility varies by a factor of several between quiet Asian sessions and news-driven US ones, so a fixed-dollar stop is far too wide half the time and far too tight the other half. Sizing the stop to ATR and then sizing the position to the stop is the correct order — the lot size calculator handles the second half.

We compared ATR-scaled stops with fixed ones on gold in should a gold stop be fixed, or scaled to volatility?