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True range

The greatest of the current bar's high-low span, the distance from the prior close to the high, and the distance from the prior close to the low.

Welles Wilder defined true range so that gaps would be counted. A bar that opens far above the previous close and then trades quietly has a small high-low range but a large true range, which is the honest description of how far the market actually moved.

True range is the raw input to atr, which is simply a smoothed average of it, and therefore sits underneath chandelier-exit, supertrend, keltner-channel and most volatility-based position-sizing.

It is a pure measurement with no interpretation attached. A large true range tells you movement was large; it says nothing about direction or about what comes next. That neutrality is why it is a better sizing input than any directional indicator.

Related: atr, average-daily-range, position-sizing, keltner-channel, gap

See it drawn

Original diagrams for the ideas on this page. Illustrative, not real market data.

A range beside a trendOne chart swinging between a flat floor and ceiling, another stepping upwards inside a pair of sloping lines.Range-boundresistancesupportprice bounces between two levelsTrendingthe trend channelhigher highs and higher lowsA range has two flat edges; a trend has two sloping ones.
Range versus trend. On the left price keeps bouncing between the same floor and ceiling, which is a range. On the right each high and each low is higher than the last, inside a pair of sloping lines called a channel.
How a position size is worked outAccount size, risk per trade and stop distance feed into one box giving the number of shares.ACCOUNT SIZE$25,000your capitalRISK PER TRADE1%of the accountSTOP DISTANCE$0.50entry to stopPOSITION SIZE500 sharesrisk budget: $25,000 × 1% = $250position size: $250 ÷ $0.50 = 500 shares
Working out a position size. Three numbers decide how big a trade is: the account, the share of it put at risk, and the distance from entry to stop. One percent of $25,000 is a $250 budget, and a $0.50 stop divides into that 500 times.

Educational only, not advice. Spotted an error? Post in Site Feedback.