TRUE RANGE (Maximum Price Movement)

True Range is a technical indicator that measures market volatility by calculating the greatest of three price ranges: the current high minus the current low, the absolute value of the current high minus the previous close, or the absolute value of the current low minus the previous close. It provides a more complete picture of price volatility than just looking at the high-low range.

Formula

TRUE RANGE = MAX [ (High - Low), ABS(High - Previous Close), ABS(Low - Previous Close) ]
Where:
High = Current period's high
Low = Current period's low
Previous Close = Previous period's closing price
ABS = Absolute value

How TRUE RANGE Works

True Range accounts for gaps between trading periods and price movements from the previous close, providing a comprehensive measure of price volatility. Higher True Range values indicate increased volatility, while lower values suggest more stable price action. This makes it particularly useful for setting stop-loss levels and identifying potential breakout points.

Trading Strategies Using TRUE RANGE

Strategy Examples

Use True Range multiplier for stop-loss placement
Identify volatility breakout opportunities
Scale position sizes based on True Range values
Combine with moving averages for trend confirmation
Use extreme True Range readings for reversal signals

Support and Resistance

Use True Range to set dynamic support/resistance levels
Higher True Range values often mark key S/R zones
Add/subtract True Range from pivot points for S/R bands
Multiple timeframe True Range confirms strong S/R levels
Monitor True Range expansion at S/R breakouts

Trend Identification

Increasing True Range suggests trend strength
Decreasing True Range indicates trend weakness
Sudden True Range spikes signal potential trend changes
Low True Range often precedes major moves
Compare True Range across timeframes for trend confirmation

Advantages and Limitations

Advantages

Accounts for gaps and price jumps
Excellent volatility measurement
Useful for position sizing
Helps set appropriate stop-losses

Limitations

Doesn't indicate price direction
Can be affected by outlier price moves
Requires context from other indicators
May lag during rapid price changes

Best Practices

Using True Range Effectively

Use True Range to determine appropriate position sizes based on volatility
Set stop-loss orders at multiples of True Range from entry points
Monitor True Range expansion/contraction for potential breakout signals
Combine with trend indicators for complete market analysis
Use multiple timeframe analysis to confirm volatility patterns
Look for divergences between price action and True Range
Consider market conditions when interpreting True Range values
Use True Range to identify periods of consolidation and potential breakouts
Adjust trading strategies based on True Range levels
Document which True Range levels work best for your trading style

Risk Management Guidelines

Scale position sizes inversely to True Range values
Use wider stops during periods of high True Range
Reduce exposure when True Range reaches extreme levels
Consider volatility-based position sizing using True Range
Monitor True Range on higher timeframes for overall risk assessment
Adjust profit targets based on current True Range levels