The True Range measures market volatility.
True Range is the greatest difference from the following choices:
- current period’s high and current period’s low.
- current period’s high and previous period’s close, or
- current period’s low and previous period’s close.
High values indicate that prices are changing a large amount during the period. Low values indicate that prices are staying relatively constant. Note that both trending and level prices can have high or low volatility.
The value is typically smoothed with a moving average. High volatility levels can sometimes be used to time trend reversals, such as market tops and bottoms. Low volatility levels can sometimes be used to time the beginning of new upward price trends following periods of consolidation.
The True Range is a measure of volatility. Major tops are typically accompanied by high volatility during the blow-off phase of a market, as traders become more and more nervous and ready to take profits. Major bottoms are usually calmer, with low volatility, as the hopes for quick profits have faded. The idea is to replace the high – low interval for the given period, as the high-low does not take into consideration gaps and limit moves.