Description
The Modified True Range (MTR) study is a technical indicator proposed by Chris Lindgren to help evaluate the probability of an underlying reaching a certain price before expiration. Based upon the classic Average True Range study, which is believed to be a measure of volatility, the MTR introduces a new approach to using it.
The Modified True Range is equal to the greater of two values:
- The absolute value of the current high minus a past value of close (by default, it's the previous close value, however, you can specify any offset);
- The absolute value of the current low minus the same past value of close.
This value is plotted as a histogram on the lower subgraph. In addition to it, the study displays the goal level: the price change to be analyzed. Using the histogram along with the goal level gives you an idea of how many times the price has changed by the desirable amount during the specified time period. In order to help you calculate the probabilities, the study also displays several labels:
- Period Length. The number of bars in the period you would like to analyze.
- Goal. The desirable price change.
- Goal Count. Represents the number of times the price has changed by the goal value during the specified period.
- Percent Goal Achieved. Equal to the percent ratio of Goal Count to Length; the statistical probability of touching the goal price.
- MTR Avg. Average Modified True Range.
- MTR Std Dev. The standard deviation of the MTR, calculated with the length period, rounded to two digits after the decimal point.
- IV Std Dev. The standard deviation of the implied volatility. This value is only available on charts with aggregation period of 1 day.
- Mean/IV Ratio. Displayed only on charts with aggregation period of 1 day. Equal to the ratio of MTR Avg to IV Std Dev. Used for ranking the trading opportunities.
Input Parameters
length
|
Defines the length of the period you like to analyze. |
grouping offset
|
Defines the offset for registering the past value of close. |
goal
|
The expected price change. |
Plots
GoalLevel
|
The level of the expected price change. |
MTR
|
The Modified True Range histogram. |
Further Reading
1. "Kiss & Touch With The Modified True Range" by Chris Lindgren. Technical Analysis of Stocks & Commodities, February 2015.
Example*
*For illustrative purposes only. Not a recommendation of a specific security or investment strategy.