Understanding the True Range (TR)

The True Range (TR) is a volatility indicator used in technical analysis to measure the range of price movement within a given period. It is a crucial component in various volatility and trend-following indicators, such as the Average True Range (ATR).

What is the True Range (TR)?

The True Range is a measure of volatility that reflects the greatest of the following three values:

1. Current High minus Current Low
2. Current High minus Previous Close
3. Previous Close minus Current Low

This indicator helps traders understand the magnitude of price movement, irrespective of gaps or price fluctuations.

How is the True Range (TR) Calculated?

The True Range is calculated using the following formula:

Where:

• High is the highest price of the current period.
• Low is the lowest price of the current period.
• Previous Close is the closing price of the previous period.

Formula Example

Let's assume the following data for a trading day:

• High: 105
• Low: 100
• Previous Close: 102

The True Range calculation would be:

1. High minus Low: $105 - 100 = 5$
2. High minus Previous Close: $|105 - 102| = 3$
3. Low minus Previous Close: $|100 - 102| = 2$

Thus:

Uses of the True Range (TR)

The True Range is used for:

1. Volatility Measurement

• Volatility Indicator: Provides insights into the volatility of a security by measuring price movement range.

2. Component of ATR

• Average True Range: Used to calculate the Average True Range (ATR), which helps in assessing the average volatility over a specified period.

Parameters

Here are the key parameters for configuring the True Range indicator:

• Data Offset (pod):

  • Default Value: 1
  • Min Value: 1
  • Max Value: 300
  • Description: Defines the number of periods used in the calculation.

• Data Type (data):

  • Default Value: hlc (high, low, close)
  • Options: hlc (high, low, close)
  • Description: Specifies the price data used for calculation.

Advantages of the True Range (TR)

• Comprehensive Volatility Measure: Captures the total range of price movement within a period.
• Supports ATR Calculation: Essential for calculating the ATR, which is widely used for assessing volatility.

Limitations of the True Range (TR)

• Does Not Indicate Direction: Measures volatility but does not provide information about the direction of price movement.
• Sensitive to Price Gaps: Can be affected by large gaps between trading sessions.

Conclusion

The True Range (TR) is a fundamental volatility indicator that provides valuable insights into the range of price movements. It is particularly useful in calculating the Average True Range (ATR) and understanding the volatility of a security. By incorporating the TR into your analysis, you can gain a clearer picture of market fluctuations and enhance your trading strategies.