The foreign exchange (forex) market is a global market that facilitates the trading of currencies. It appeals to those seeking to build a fortune or careers from highly volatile currency trading. Forex trading can be profitable, primarily if you understand and apply the available tools smartly.
The average daily range is one such tool that can help you make prudent trading decisions. It is basically an indicator in the foreign exchange market that all forex traders must learn about.
Keep on reading to learn more about the average daily range of forex and how it applies to trading.
The average daily range (ADR) is an indicator that shows the average pip range of a currency pair over a given time period.
To define the average daily range in the forex market, we must also define the average pip range, which is included in the ADR definition. Pip stands for Percentage-In-Point or Price Interest Point.
Consider the price of a trading pair, which might be 1.27776. Because the price has five decimal places, the final value is known as a pipette.
The number in the fourth decimal place represents the pip, while the final number on the end represents the number of pipettes. As a result, each pip contains ten pipettes.
In the above example, there is one pip and six pipettes, for a total of 16 pipettes. Traders can watch the amount of money they gain or lose by the number of pips gained or lost during a trade.
The average pip range is the number of pips in a given time frame or how many pips a currency pair changes in a given time.
The Pip range further defines the average daily range by expressing market changes.
Calculating a currency pair’s daily range is a simple process. Simply measure the distance between a currency pair’s daily highs and lows. The technical indicator is fully customizable, and you can configure it to take as many periods as you want. Let’s look at an example of how ADR is calculated.
Take we adjust our ADR indicator to account for five days.
The distances (range) between the highest and lowest points of each of these days are as follows:
The ADR calculator formula is as follows:
ADR = (n1 + n2 + n3 + n4 + n5) / 5
And now we apply the values to the formula:
ADR = (56 + 27 + 78 +30 + 42) / 5
ADR = 233 / 5
ADR = 46.6 (approx. 47)
The more periods you consider, the more “n” values you will have and the greater the divisor in the formula. So, let’s say you choose a one-year ADR period. Because there are 52 trading weeks in a year and five trading days in a week (52 x 5 = 260), the formula will have 260 “n” values. You’ll have to add 260 “n” values and divide them by 260.
Fortunately, you won’t have to do this manually because the ADR indicator in your trading platform will do it for you. You only have to select the period input that you want the ADR to take into account.
The ADR indicator has a very simple output, and in most cases, after you apply the indicator, you will see an additional text with the output values on your chart. The ADR indicator should display a number representing the n-periods ADR value.
The daily chart of the EUR/USD forex pair in the MT4 platform is shown above. The ADR indicator has been attached to the chart. Although you may not notice it, the tool is located in the top left corner of the chart. It is marked by a small orange rectangle.
There are two values in that. The first with an orange arrow represents the 15-period ADR, and the second with a red arrow represents the current (last bar) ADR value.
The number shows on the 15-day ADR as 1165. This value is equivalent to 116.5 pips, while today’s (current bar) ADR value is 528, which is equal to 52.8 pips. Remember that the way you read the pip value may differ depending on your chart settings and ADR indicator.
To return to our example, the EUR/average USD’s daily move over the last 15 days is 116.5 pips. However, the EUR/USD has only moved 52.8 points today. This means that the EUR/USD has been relatively quiet today. Regardless of the strategy used, this can be helpful information for the trader.
The current daily low and high are required to construct the current ADR range.
To obtain the upper and lower levels of the ADR range on the chart, use the ADR value as follows:
The image below depicts these two steps.
On the chart above, we see a 15-day ADR indicator. The ADR value for 15 periods is 1028, corresponding to 102.8 pips. When we apply the 102.8 pip distance between the daily high and low, we obtain the two red dotted lines shown in the image.
In our case, we’re using a more advanced ADR indicator that automatically plots the upper and lower levels of the range. Certain functions may or may not be available depending on your selected ADR indicator.
After you’ve added the ADR to your chart, you may use it in various ways depending on your trading style. We’ll look at an example of how an ADR may be used as a trading strategy.
We’ll look at two scenarios in which the ADR indicator might help you open trades.
The first case occurs when price action breaks through the upper or lower level of the daily range. In this case, you should open entering a trade in the direction of the breakout.
The second case is when price action reaches the upper or lower level of the daily range and bounces off of it. In this case, you should consider making a trade in the direction of the bounce.
When trading with leveraged instruments, always use a stop loss order.
If you trade an ADR breakout, you should use your price action expertise to place your stop-loss at a technical level. If the range breakout is bearish, the same force applies.
If the price action bounces from one of the ADR levels and you trade in the direction of the bounce, your stop-loss order should be placed beyond the swing created by the price bounce.
The ADR indicator might be a helpful guide in determining the potential of your trade.
For example, if a forex pair’s historical average daily range is 80 pips and price action for the day has come close to reaching this range. It would make sense to consider trailing your stop a bit closer, assuming that the price move has likely reached its limit for the day.
Traders should not enter the market using the average daily range. This is because the average daily range does not guarantee currency pair movement. ADR is simply a guide that shows the volatility that traders may expect from a currency pair throughout a session.
Traders who buy or sell at the extremes of the daily range should expect inconsistent results because anything can drive the price. Prices might fluctuate at any time and in any direction. Varying stated that the average daily range is a beneficial tool for speculating on various currency pairs.
The average daily range is often calculated using the trader’s preferred number of days, such as 10, 20, or 30 days.
The trader may help maximise their profits in the forex market by using the average daily range.
Traders may better determine profit targets and appropriate stop-loss levels by monitoring the average daily range. It can help traders in making better use of resistance and support levels.What is margin call in forex? - Time to top up or close out — 2023
A support or resistance level is the zone a currency pair reaches after trading at its average daily range. At this point, it is more likely to hold or become a reversal point.
Average daily range values can also aid traders by expressing the exhaustion point for a currency pair or asset under consideration. Traders can more closely evaluate the probabilities of their trades using this information.
Blind trading is when you enter a trade without using a pin bar to signal that a level is likely to hold. A pin bar is a pattern composed of a single price bar expressing a stark price reversal and rejection.
It suggests that a possible reversal is on the way.
Four factors must be present for a blind setup to be favourable to the trader.
These are as follows:
While trading any price action strategy, the daily time frame is far more predictable and constant. Some traders base their decisions on four-hour and daily time frames.
Second, the key level is critical to the success of price action trading. Traders might stick to higher time frames by employing key levels. The daily time frame is significantly more effective since it helps discover areas where traders may take blind entries.
Momentum is the third factor in blind trading. Having market momentum in a trader’s favour allows them to move with the market rather than against it, which adds to a trader’s edge.
Trading with the flow allows you to move in the direction of least resistance, increasing your chances of success.
Lastly, traders should take advantage of the average daily range. As previously mentioned, using a daily time frame to determine the best course of action is essential. Traders may view the trends of a given trade by taking an average of the daily candles over the previous month.
Although these four elements may appear to be diametrically opposed, they work together to increase the likelihood of success in a blind trade.
You may paint a picture that helps traders “visualise” a trade using the daily time frame, key support and resistance levels, momentum, and average daily range.
Volatility fluctuates with time, as does the average daily range, which is, after all, merely a measure of volatility. This is a key point to remember, even though average daily ranges in the forex market are generally constant and rarely move dramatically.
Still, a 100-pip move in a day may be the usual one day and then grow to 130 or 150 pips the next. As a result, somewhat different sizes for a stop loss or profit objective would be appropriate for the two periods. All successful forex traders pay attention to the average daily range, which is a basic yet strong statistical fact.
It’s easy to calculate: add up how much an asset moved from high to low in a day for 21 days, then divide by 21. You will be given the asset’s average daily range over 21 days.