True Range

The average of the True Range, referred to as the Average True Range (ATR) is used to represent volatility in some trading strategies i.e. entry or exit (protective stops). 

True Range

The daily price range (High - Low) is often used as the basis for volatility indicators.  However there is an issue with using the price range in that there can be a significant gap between the daily close and next open price that is not reflected in the calculation.  The True Range overcomes this problem by incorporating the gap into the calculation.

 

True Range Calculation

The True Range is the difference between the True Range High and True Range Low.

True Range = True Range High - True Range Low

where:

  • True Range High is the greater of today's High and yesterday's Close
  • True Range Low is the lesser of today's Low and yesterday's Close


Example 1 - Gap Up

When today's open gap ups the True Low is yesterday's Close.
When today's open gap ups the True Low is yesterday's Close.

Example 2 - Gap Down

When today's open gapdown the True High is yesterday's Close.
When today's open gapdown the True High is yesterday's Close.


Application of True Range

The average of the True Range, referred to as the Average True Range (ATR) is used to represent volatility in some trading strategies i.e. entry or exit (protective stops). 

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