Direct Answer
True range, defined by J. Welles Wilder, is the greatest of the current high-low range, the distance from the previous close to the current high, and the distance from the previous close to the current low. It extends the range to include overnight gaps.
True Range: Formula, Meaning, Signals, Examples and How to Use It
How Is True Range Calculated?
True range, defined by J. Welles Wilder, is the greatest of the current high-low range, the distance from the previous close to the current high, and the distance from the previous close to the current low. It extends the range to include overnight gaps.
Formula: TR = max( High - Low, |High - Previous Close|, |Low - Previous Close| )
Inputs:
- Current high
- Current low
- Previous close
Worked example. A bar with a high of 52 and a low of 49 after a prior close of 54 has a true range of 5.00, because the gap down exceeds the bar's own range. The inputs are illustrative numbers, not market data.
Reading it. It is the size of a single bar's movement including any gap, in price units. It forms the basis of the Average True Range, which smooths it over several bars.
Limits. It is a single-bar figure and noisy on its own, and it carries no directional information. Being in price units, it is not comparable across instruments without normalizing by price.
What is True Range?
True range, defined by J. Welles Wilder, is the greatest of the current high-low range, the distance from the previous close to the current high, and the distance from the previous close to the current low. It extends the range to include overnight gaps.
How to use True Range
It is the size of a single bar's movement including any gap, in price units. It forms the basis of the Average True Range, which smooths it over several bars. A reading alone is never a buy or sell signal; it needs context from price structure, volume, volatility and the broader market regime.
Strengths
- Taking the maximum of three distances puts overnight gaps into the range, so a gap day is measured at its full extent.
- It needs only the current bar and the prior close, so a value is available from the second bar onward.
- Reproducible when the formula and data convention are fixed.
Weaknesses and limitations
- Three candidate terms mean the value switches between formulas bar to bar, so one bar's TR can be set by a gap and the next by its range.
- The first bar of a series has no previous close, so it falls back to high minus low and is not strictly comparable with the rest.
- Correlated indicators can create false confidence by repeating the same underlying information.
Editorial and risk note
This page is educational content, not individualized investment advice. It should not imply guaranteed prediction, accuracy or outperformance.
Frequently Asked Questions
Is True Range a buy or sell signal?
No. It is the size of a single bar's movement including any gap, in price units. It is a single-bar figure and noisy on its own, and it carries no directional information. A trade built on it still needs a trigger, an invalidation rule, a position size and realistic execution assumptions.
What is the best setting for True Range?
True Range is computed from current high; current low; previous close, so the choices that matter are the data convention and the window it is read over. Test those across instruments, regimes and out-of-sample periods instead of fitting one historical winner.
Can True Range be used by itself?
It is a single-bar figure and noisy on its own, and it carries no directional information. Being in price units, it is not comparable across instruments without normalizing by price. For that reason it is read next to measures of direction, participation, valuation, liquidity and risk, not alone.
Does True Range work on every timeframe?
The calculation (TR = max( High - Low, |High - Previous Close|, |Low - Previous Close| )) can be run on any bar size, but behavior is not portable: a reading on a five-minute chart describes a very different market window from the same reading on a daily chart. Validate the exact timeframe before relying on it.
Why does True Range give false signals?
Three candidate terms mean the value switches between formulas bar to bar, so one bar's TR can be set by a gap and the next by its range. The first bar of a series has no previous close, so it falls back to high minus low and is not strictly comparable with the rest. Lag, noise and regime changes add to this, because market participants react to new information after the reading is calculated.
How should True Range be backtested?
Rebuild True Range from current high using point-in-time data, write the rules before testing, include delisted securities where relevant, model realistic fills and costs, reserve a validation sample and compare with a simpler baseline.