What is True Range and how is it calculated in trading futures?

[servant119b]

I am not sure where to post this question, but I found this site through a google search. I ran across an equation used in trading futures:

True Range = Maximum(H-L, H-PDC, PDC-L)

H = Current High
L = Current Low
PDC = Previous Day's Close

What I am not sure of, does this question mean that True Range is the maximum of either H-L, H-PDC, or PDC-L? Like you figure out all 3 of them and then just pick the biggest and that is True Range?

Please put this in the easiest terms possible without using math lingo to answer the question.

 

[AlephZero]

This is done because there may be a "jump" in price between the close of one trading session and the opening of the next one. The previous closing price might be lower than the "current low", or higher than the "current high".

Try playing with some numbers. For example suppose the previous close was 100, the current session opened at 105 and the current low and high are say 103 and 108. The "True Range" is 108 - 100 = 8, not 108 - 103 = 5.

On the other hand if the previous close was 110, the true range is 110 - 103 = 7, not 108 - 103 = 5.

If the previous close was between the current high and low (say 104) it makes no difference and the true range is 108 - 103 = 5.