V.13:06: (238-242): The Range Indicator by Jack L. Weinberg
Here's a new indicator based on the change in a day's trading range as evidence of the start of a new trend in a market.
Markets tend to trade in relatively tight price ranges most of the time; therefore, low daily ranges indicate trading ranges. Prices move to reach toward new levels for a new trading range when a fundamental change has occurred in the supply/demand balance for that commodity. A dramatic change in the daily range relative to the interday ranges indicates that a change in the fundamentals may be present and may be a significant event. Such a fundamental change is usually, but not always, accompanied by an increase in the daily trading volume for that commodity.
A classic example of such a situation occurred on August 19, 1993, in the September 1993 yen contract. That day, the central bank of Japan tried to depress the value of the currency to prevent it from going above the 100 yen per dollar level. The resulting dramatic increase in the daily range (and the accompanying increase in volume) can be seen in Figure 1.
Many indicators and rules have been proposed to identify these situations. Another key area of interest has been the attempt to identify the direction of price after a significant change in the daily range to interday range.
One of the first to try was J. Welles Wilder in his New Concepts in Technical Trading Systems . In that work, he proposed the use of a new indicator he called the average true range. This indicator took into account the issue of limit up and/or limit down days and their effect on the range calculations.