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 was 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”. Wilder believed traders should focus on trading on trending markets. J. Welles Wilder developed trading methods that helped traders to identify trending and non-trending systems. How strong a market was trending or not trending by using traders directional Indicator or Average True Range or ATR indicator.
How To Attach 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.
Calculations of True Range Indicator :
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:
- Today’s high to today’s low.
- Yesterday’s close to today’s high.
- Yesterday’s close to today’s low.
- The day’s trading range is simply high − low.
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. This is not a stock’s exponential change. This means that lower price stocks. Which will have lower absolute changes in TR versus absolute change in higher-priced stocks.
TR Defined In Another Way:
There are only three numbers traders need to know for determining true range:
- Previous bar’s close (C.1).
- Current bar’s high (H).
- 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.
Interpretation of TR Indicator:
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 true range indicator alerts traders that a stock’s trading activity is increasing and becoming more volatile. 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.
In order to utilize ATR in the most efficient way, the first thing a trader needs to understand is what the ATR indicator is and also what the indicator is not. 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. Traders are using this indicator as a tool confirm. If there is real interest in stock’s then current directional movement of this indicator. Finally, bullish breakouts or moves should be accompanied by an increase in ATR. Likewise, the bearish breakdowns or moves with an increase in ATR.