True Range
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Key Takeaway
True Range is the single-bar volatility measurement used as the input for ATR, calculated as the largest of three values that capture total price movement including gaps from the previous close.
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What Is True Range?
True Range is the single-bar volatility measurement used as the input for ATR, calculated as the largest of three values that capture total price movement including gaps from the previous close.
How True Range Works
Frequently Asked Questions
Why does True Range use three calculations instead of just the high minus the low?
The simple high-minus-low calculation only measures price movement that occurred within the current bar's session. If price gaps significantly from the previous close — opening far above it due to overnight news, or below it following a sell-off — that gap represents real price movement and real financial exposure for anyone holding the asset. The high-minus-low measurement would completely miss this. By also measuring the distance from the current high to the previous close and from the current low to the previous close, True Range captures all price movement that occurred since the last bar closed, including gap movements, producing a complete volatility reading.
How is True Range different from Average True Range?
True Range is a single-bar measurement — it calculates the complete price movement for one specific bar using the three-value maximum formula. It varies significantly bar to bar, with unusually large values on high-volatility events and smaller values on quiet, narrow-range bars. Average True Range smooths this volatility by applying Wilder's smoothing method across a lookback period, typically 14 bars, to produce a running average that reflects typical rather than exceptional volatility. ATR is the analytically useful version because it is stable enough to apply to stop placement and position sizing without being distorted by single outlier bars.
Does True Range apply to cryptocurrency markets differently than traditional markets?
The True Range formula applies identically to cryptocurrency markets, but cryptocurrency's specific characteristics make its gap-capture property particularly relevant. Traditional equity markets close overnight, producing gaps when significant news occurs between sessions. Cryptocurrency markets trade continuously 24 hours a day, seven days a week, meaning gaps are less common during normal conditions. However, extreme volatility events in crypto — major protocol failures, regulatory announcements, or liquidity crises — can produce large candles with extreme high-low ranges that are well-captured by True Range. Weekend low-liquidity periods can also produce gap-like price movements that the True Range formula handles correctly.
Common Misconceptions About True Range
True Range and the standard high-minus-low range measure the same thing
True Range and the simple high-minus-low range produce identical values only when a bar opens within the previous bar's range and no gap occurs. Whenever a bar opens above the previous high or below the previous low, True Range will be larger than the simple high-minus-low range because it incorporates the gap distance. On gap days, the difference can be substantial. Relying on simple high-minus-low ranges for volatility measurement systematically underestimates actual price exposure on any bar that includes a gap open, which is a significant limitation in volatile asset classes like cryptocurrency.
A very large True Range on a single bar means volatility has permanently increased
A single large True Range value indicates an unusually high-volatility bar but does not confirm that volatility has sustainably increased. News events, flash crashes, or large liquidation cascades can produce one or two very large True Range bars followed by an immediate return to normal price movement amplitude. The ATR smoothing process incorporates these outlier bars gradually and then fades their influence over subsequent bars. Treating a single large True Range event as a new volatility baseline leads to stop-loss placement that is unnecessarily wide during periods that have already returned to normal volatility levels.
True Range can be used directly as a stop-loss distance without smoothing
Using a single bar's True Range as a stop-loss distance introduces excessive variability into risk management. On quiet, narrow-range days, the True Range might be very small, placing stops far too close to the entry and increasing the probability of random stop-outs. On high-volatility news days, it might be extremely large, placing stops at unreasonably wide distances that undermine risk management. The Average True Range — a smoothed measure of typical True Range over recent bars — provides a stable, consistent volatility reference for stop placement that is not distorted by the random variation of individual bar measurements.