True Range

Parameters:

There are no adjustable parameters for this indicator.

Style:

• Customizable options for visual representation (line color, style, etc.)

True Range (TR) is a fundamental concept in technical analysis, primarily used to measure market volatility. Developed by Welles Wilder, the True Range is the basis for several other indicators, including the Average True Range (ATR). TR helps understand the price fluctuations within a given period, offering insights into market dynamics beyond the daily high and low prices.

Calculation of True Range: True Range is defined as the greatest of the following three values:

1. "Current High" - "Current Low": it measures the range of the price action within the current period.
2. "Current High" - "Previous Close": it captures the gap between the current high and the previous close, indicating a significant price move that might not be reflected in the high-low range.
3. "Current Low" - "Previous Close": it captures the gap between the current low and the previous close, similarly indicating significant price movement.

The formula can be expressed as:

TR=max(Current High − Current Low,∣Current High − Previous Close∣,∣Current Low − Previous Close∣)

Key Aspects of True Range:

1. Volatility Measurement: By considering gaps and overnight price changes, True Range provides a more comprehensive measure of volatility than just the daily high-low range.
2. Gaps and Limit Moves: True Range captures price gaps, which are essential in markets where prices can open significantly higher or lower than the previous close. It is particularly relevant in futures and other markets that might experience limited moves or significant after-hours trading.
3. Foundation for ATR: The True Range is a building block for the Average True Range (ATR), a more widely used volatility indicator. The ATR smooths out the True Range over a specified period, providing a clearer long-term view of volatility.

Application of True Range:

1. Volatility Analysis: Traders use True Range to analyze market volatility. High True Range values indicate high volatility, suggesting potential trading opportunities or higher risk.
2. Stop-Loss Placement: By understanding the typical price range for an asset, traders can set more informed stop-loss levels that account for normal market fluctuations, reducing the chance of being stopped early.
3. Breakout Confirmation: A significant increase in True Range can confirm a breakout from a price pattern, indicating that the price movement is strong and likely to continue in the breakout direction.
4. Trend Strength Assessment: When used in conjunction with other indicators, such as ADX, the True Range can assist to estimate the strength of a trend. Higher volatility often accompanies stronger trends.

Limitations:

1. Lagging Indicator: True Range is not predictive; it reflects past price movement. For predictive analysis, it is often combined with other indicators.
2. Market Conditions: True Range does not distinguish between the causes of volatility (e.g., news events, economic reports), which can lead to false interpretations if used in isolation.
3. Dependence on Time Frame: The significance of True Range can vary with different time frames. What is considered high volatility on a daily chart might be standard on an intraday chart.

Conclusion: True Range is a versatile and essential component in technical analysis, providing a more accurate measure of market volatility by considering the highest of the day's high-low range and the gaps from the previous close. Its utility in forming other indicators, such as the ATR, underscores its importance in volatility assessment, stop-loss placement, and breakout confirmation. However, like all indicators, it should be used with other tools and market analysis techniques to form a comprehensive trading strategy. Understanding True Range helps traders better understand market dynamics and make reasonable and prudent decisions considering volatility.