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True Range Indicator Formula, Meaning, Strategy

True Range Indicator Formula

True Range Indicator is an indicator that measures volatility. J. Welles Wilder developed this indicator. His most famous classic trading book is “New Concepts in Technical Trading Systems“. The developer, Wells Wilder believed that most trading systems were broken down into two basic components. The first part of this book focuses on the “technical trading system”. The other part on money management or in his words “capital management technique”.

What is True Range Indicator?

Wilder, developer of the indicator, included the price comparisons among the subsequent bars in order to account for gaps in his range calculation. The raw True Range Indicator is then smoothed (a 14-period smoothing is common) to give an ATR or Average True Range. The True Range can be smoothed by using a variety of MA (moving average) types. This includes Simple, Exponential, Welles Wilder, etc.

Difference between ATR and TR

Though ATR (Average True Range) and TR (True Range) sound similar, there are basic difference between the two. The Average True Range takes the average of the true range of price bars. And, True range takes into account the previous price bar information into its calculation when price gaps are involved.

How to Calculate the True Range?

J. Welles Wilder defined volatility as the maximum range that the price moved off this indicator. The developer described the price movement as the TR. We can calculate TR either during the day or from prior days close to the extreme point reached during the day. The true range indicator calculation parameters are:

  1. Today’s high to today’s low.
  2. Yesterday’s close to today’s high.
  3. Yesterday’s close to today’s low.
  4. The day’s trading range is simply high − low.

How to Set the True Range Indicator to a Chart?

Traders can know more about the TR in the STUDIES section of Zerodha Kite. It is also included in the Kite mobile App. TR can be applied to to any charts likes daily, weekly, monthly or intraday. You can also Check the image below to understand how to attach the TR indicator in HDFC Bank share price chart.

True Range Indicator

Next charting platform is Upstox Pro. Here, I added the indicator on the indicator searching tab. Then click on apply. After clicking on apply, it will appear beneath the price chart.

True Range Indicator

What are the Specific Characteristics of the TR Indicator?

  • This indicator’s formula extends its calculation to include the prior day’s closing price.
  • If it was outside of today’s range. The TR indicator needed to be an average figure if the ATR to be a more meaningful indication of volatility.
  • In TR indicator, many traders typically use 14 or 7 periods to calculate.
  • In Wilder’s original Volatility system, he used 7 periods. Furthermore, as with most indicators, traders encouraged to test which period works best to fit this style of trading.
  • The true range indicator reflects absolute changes in volatility.

More Information about TR

There are only three numbers traders need to know for determining true range:

  1. Previous bar’s close (C.1).
  2. Current bar’s high (H).
  3. Current bar’s low (L).

True Range is simply the greatest distance traders can find between any two of these three prices. It is the greatest of the absolute values of the three differences between the three prices including –

  • High minus low.
  • High minus previous close.
  • Previous close minus low.

What are the Fruitful True Range Indicator Strategies?

The TR is an absolute number. It is more important to know what was the previous period’s reading as opposed to the current reading.

  • Long-term low readings of the TR that a stock was range bound.
  • An increasing TR indicator alerts traders that a stock’s trading activity is increasing and becoming more volatile.
Buy TR
  • ATR indicator is based on the premise that if a stock moves a certain percentage from a current price level (a breakout), the odds favor a continuation in the direction of the move.
  • Traders can also interpret this as the beginning of a new trend.
True Range Indicator flat range
  • When there is less activity of buying and selling, the TR range will be flat.
Divergence with TR

The next example I am going to show you is divergence. We know that divergence comes when the price and indicator movement doesn’t match. Just like here, price made lower lows while the TR indicator made highs. Later the price follows the indicator and went highs.

Conclusion:

In order to utilize ATR in the most efficient way, the first thing a trader needs to understand is what the ATR and TR indicators are. ATR is not a directional indicator like the –DI and +DI indicator. The strength of this indicator is in identifying if a breakout in a stock is generating any real interest or not. The developer of the True Range indicator believed that strong moves in stock could be spotted increases in volatility. False breakouts would be usually followed by traders with relatively narrow ranges.

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