What does the term "true range" relate to in DMI calculations?

The term "true range" in the context of Directional Movement Index (DMI) calculations is specifically defined as the greatest of the following three values: the difference between the current high and low, the difference between the previous close and the current high, and the difference between the previous close and the current low. This measure is crucial for understanding price volatility and is integral to calculating the Average True Range (ATR), which provides insights into market dynamics.

By considering the highest and lowest prices within a specific period, the true range captures the price movement and volatility more accurately than merely observing closing prices or single-day movements. This comprehensive approach allows traders to assess not only the everyday fluctuations but also the potential gaps or extreme movements that can occur outside of regular closing hours. This is particularly valuable in markets that exhibit significant intraday volatility or gaps between trading sessions.

In summary, true range is essential for quantifying volatility and accurately reflecting the price behavior of a security over a given time frame, making it a critical component of the DMI calculations used for evaluating trends and potential trading opportunities.