This simple charting technique is derived from J. Welles Wilder’s true range.
J. Welles Wilder, one of the founders of modern technical analysis, developed many technical indicators and tools still in use today: relative strength index (RSI), average directional movement index (ADX), and true range (TR), to name only a few. I have developed a simple charting technique derived from his construction of the true range.
Wilder’s true range concept presupposes that the human mind is aware of not only a present period’s activity, but also the immediate prior period’s activities and results. Consciously or not, traders and technicians are cognizant of present market action relative to the previous period’s performance and levels. Therefore, when determining data to analyze, at least a whisper of the previous period’s closing price should be factored into the present data.
FIGURE 1: A SHORT-PERIOD CHART OF THE DOW JONES INDUSTRIAL AVERAGE (APRIL 2011–MAY 27, 2011)