Category: Advanced Indicator Set 1

Input parameters

Calculations

True Range = Max3(Abs(High-Low), Abs(High-Close[1]), Abs(Close[1]-Low))

where:

Max3(a,b,c) is maximum of a, b, and c,

Abs(a) is absolute value of a, and

Close[1] is close one bar ago.

Discussion

Introduced by J. Welles Wilder, Jr. [1], the True Range indicator is the actual day range (High-Low) plus the gap, if any, between today’s High or Low and yesterday’s Close. The True Range can be viewed as the maximum price movement over 24-hour period. It is always a positive number.

Wilder measured market volatility by averaging the True Range over the recent N days. The True Range indicator is in the core of such well-known Wilder’s indicators as Directional Movement Indicator (DMI) and Average Directional Movement (ADX) indicator. Besides simple averaging, there exist multiple averaging techniques [2-5] to build a number of other volatility and directional movement indicators on top of the True Range indicator.

References

1. Wilder, J. Welles, New Concepts In Technical Trading Systems, 1978, Greensboro, NC 27402: Trend Research.

2. Summers, Jim, Programming the true range in Wilder’s DMI system, Technical Analysis of Stocks & Commodities, April 1988, v.6, no.4, p.153-156.

3. Aan, Peter, Volatility System, Technical Analysis of Stocks & Commodities, July 1989, v.7, no.7, p.230-232.

4. Hartle, Tom, The ADX, Technical Analysis of Stocks & Commodities, May 1993, v.11, no.5, p.213-214.

5. Abraham, Andrew, Trading The Trend, Technical Analysis of Stocks & Commodities, September 1998, v.16, no.9, p.425-427.