Constructing true-range contraction filters before expansion

Two classroom steps

The archive facts describe a historical workflow for measuring range and pairing a constructed setup with a size rule. Editorial interpretation: present that workflow as a two-step classroom rather than as a single indicator recipe.

First, build a contraction filter that flags range contraction, the shrinkage of volatility and daily range that can precede later range expansion. The detector is supposed to watch range compression itself, because that compression is the precursor used to anticipate later expansion.

Second, feed that same average true range distance into the size decision so exposure is bounded before the trade is placed.

Range contraction as the lead condition

Price ranges commonly shrink before they widen. A filter can therefore treat contracting volatility and daily range as the lead condition, rather than as confirmation after the move.

Range expansion is the later widening of daily range that can start or resume a directional move. The classroom sequence keeps that widening off the trigger list until compression has already been marked.

Building true range

True high is the greater of the period high and the prior close, so a gap down is still counted inside the period range.

True low is the lesser of the period low and the prior close, so a gap up is still counted inside the period range.

True range is the difference between those two values: the distance between true high and true low for one period.

Average true range as the working distance

Average true range is constructed as a simple moving average of true range, with a twenty-period lookback used as the typical window. That average is the working volatility measure for the rest of the construction.

Editorial interpretation: the contraction filter and the size rule share this one distance, so the exposure bound is taken from the same range measure that flagged the shrinkage.

Readings inside one period

Relative close location is the close minus true low, divided by true range. It equals one or zero at the un-gapped extremes of that true range, and it locates the close inside the same true-range window already built for the filter.

Expansive urge is the open-to-close change divided by true range. It equals one or minus one when the period travels the full true-range extremes, and it records the signed share of true range traveled from open to close.

On selected high-return periods, expansive urge and relative close location clustered toward the same extreme. That cluster is the baseline an intraperiod divergence construction compares against.

Intraperiod divergence is unusual range-versus-close behavior accumulating inside a bar, intended to be visible before a large follow-through move.

Separate bullish and bearish constructions

A single signed divergence reading is not enough. Separate bullish and bearish constructions are required, because one indicator cannot be treated as both constructive and destructive at the same time.