Average True Range

In his book “New Concepts in Technical Trading Systems” Welles Wilder introduced the Average True Range (ATR) indicator. He wanted to measure a security's volatility only, so the indicator does not measure the underlying securities direction or trend. It is instead a measure of the degree to which the security is moving.
Wilder wanted to be able to account for extreme volatility in commodity markets that often had gaps and limits. So that you understand what he was looking at, a gap is when price opens above or below the previous day’s close. A limit is when price opens or closes above or below the maximum allowed daily move and is not traded again until the next day.
In developing the Average True Range, he first develop the True Range and defined it as follows.
True Range is the greatest of the following three occurrences
1.    The current High less the current Low.
2.    The absolute value of the current High less the previous Close.
3.    The absolute value of the current Low less the previous Close.
By using these calculations, you get the actual range of movement in a security. Do not be confused by the absolute value portion of the second two instances. This was simply to ensure that values were always positive. By using the True Range you can then calculate the Average True Range over a given period of time.
Let’s take a look at the ATR as it is plotted on the EURUSD 1 day chart. This chart encompasses the melt down of 2008 that had extremely high volatility. In fact only now in late 2009 are ranges returning to normal levels.

This is all fine to understand but I am sure what you really want to know is how can you use the ATR to trade? The most common use of ATR is for placement of stops. Because you know the average range that a currency ranges in a day, you can set your stop past that number and your stop should be safe as you look for profits on a trade.
Most traders use the ATR * 1.5 or 1,25 to place their stops. Here is an example. Current price is 1.4674 and the ATR is .0053. Your stop should be reasonably safe if you placed it at ATR *1.5, which would equal 79.5 points from current price. Therefore, if you were planning a short position your stop would be around 1.4754. If you were planning a long position your stop would be around 1.4596.