The foreign exchange (forex) market is a massive worldwide market that facilitates buying and selling currencies.
As such, the forex market is an attractive feature for those looking to attempt to profit off trading currencies. Forex trading can be profitable, especially if you use all the available tools.
One such tool is the average daily range. In the foreign exchange market, it is an essential indicator that all forex traders need to understand.
This article will examine the average daily range of forex and how it applies to trading, so continue reading to learn more.
Defining Average Daily Range
The average daily range (ADR) is an indicator that displays the average pip range of a currency pair throughout a particular period of time.
When defining the average daily range in the forex market, we must also define the average pip range as it holds a place in the ADR definition. Pip stands for Percentage-In-Point or Price Interest Point.
For example, consider the price of a trading pair, which could be 1.27776. Since the price has five decimal places, the last value is what is known as a pipette.
The final number on the end represents the number of pipettes, while the number in the fourth decimal place represents the pip. So, each pip contains 10 pipettes.
In the example we show above, there is one pip and six pipettes, which equals to 16 pipettes. Traders can use the number of pips gained or lost during a trade to display the amount of money they gain or lose.
Average pip range refers to the number of pips in a specific time frame or how many pips the currency pair changes in a specified time period.
The Pip range helps define the average daily range further, as it helps express changes in the market.
Can Traders Use Average Daily Range To Enter The Market?
Traders shouldn’t use the average daily range to enter the market. This is because the average daily range does not guarantee the movement of the currency pair.
ADR simply provides a guide demonstrating the volatility traders can expect from a currency pair during a session.
Traders who buy or sell on extremities of the daily range should expect inconsistent performance, as anything can drive the price. Prices may fluctuate in any direction at any time.
With that said, the average daily range is a beneficial tool in speculating on varying currency pairs.
Why Is The ADR In Forex Important?
The average daily range is usually calculated based on whatever particular number of days the trader prefers, such as 10, 20, or 30 days.
Using the average daily range, the trader can help maximize their profits in the forex market.
By monitoring the average daily range, traders can better determine profit targets and appropriate stop-loss levels. It can help traders make better use of resistance and support levels.
A support or resistance level refers to the zone the currency pair reaches when it has already traded at its average daily range. At this point, it is more likely to hold or possibly become a point of reversal.
Average daily range values can also help traders simply by expressing the exhaustion point for a currency pair or asset that the trader is trading. With this information, traders can more closely evaluate the probabilities of their trades.
What Is Blind Trading And How Is ADR Involved?
Blind trading refers to taking part in a trade without using a pin bar to indicate that a level will probably hold. A pin bar is essentially a pattern that consists of a single price bar, which expresses the stark reversal and rejection of price.
It indicates that a potential reversal is imminent.
Four factors need to be present to make a blind setup favorable for the trader. These consist of:
- Daily time frame
- Key levels
- Average daily range
The daily time frame is much more predictable and constant while trading at any price action strategy. Some traders do so based on a four-hour time frame as well as daily time frames.
Secondly, the key level plays a crucial role in the effectiveness of price action trading. By using key levels, traders can stick to higher time frames. It is much more effective to use the daily time frame to do this, as it helps find areas where traders can take blind entries.
The third component for blind trading falls to momentum. Having market momentum in the trader’s favor allows them to move with the market instead of attempting to fight against it, which compliments a trader’s edge.
Trading with the flow helps to move in the direction of least resistance, raising the likelihood of successful trading.
Lastly, traders should use the average daily range. As mentioned above, it is essential to use a daily time frame to determine the best course of action. By using the daily candles from the past month, traders can take an average, helping them view the trends of a given trade.
How Do These Components Come Together?
Although each of these four components may seem like opposites of each other, they come together to create a higher chance of success in a blind trade.
Using the daily time frame, key levels of support and resistance, momentum, and average daily range, you can paint a picture that helps traders “visualize” a trade.
Scenarios When ADR Is Helpful In Trades
There are several scenarios where average daily range indicators are helpful in opening trades. Such as when the price action breaks through the high or low level of the daily range.
Secondly, ADR indicators help in cases where the price action reaches the upper or lower level of the daily range and springs from it.
Stop Loss On ADR
Stop-loss orders can help traders protect their trades.
They are especially critical when trading on leverage. Traders who place their trade in the direction of the bounce should place their stop-loss order on trades past the swing that a price bounce from one of the ADR levels creates.
Profiting With ADR
ADR indicators are helpful for guidance and can display a clearer picture of the trade’s potential.
This essentially means that if a trader’s trading pair has reached its historical average daily range, it would be sensible to consider trailing their stop slightly closer using the assumption that the move in price has probably reached its daily limit.
When trading currency pairs, traders must have a detailed strategy for optimal success.
Although the forex market provides no guarantees, traders can utilize specific techniques and tools for the best results. Using average daily range lends well to traders, allowing them to base their decisions on previous trends in the particular currency pair.
The calculation of the average daily range of a currency pair is a simple process. It takes into account the distance between the daily highs and lows of a currency pair. For example, let’s consider a few ranges of highs and lows for five days.
- N1 = 54 pips
- N2 = 32 pips
- N3 = 73 pips
- N4= 58 pips
- N5 = 46 pips
With the differences between the highest and lowest points of each day, expressed as N1, N2, and so on, we can calculate the ADR for those five days.
The formula for the average daily range is as follows:
ADR = (N1 + N2 + N3 + N4 + N5) / 5
So, if we apply the values to the formula, it would look something like this:
ADR = (54+32+73+58+46) / 5
ADR = 263/5
ADR = 53
If a trader wishes to consider a more extended period of time, there will be more “N” values, and the top number will be larger. For example, the numbers would look different if the trader wanted to take a six-month period to determine the ADR.
Since there are 26 trading weeks in six months and five trading days in each week, there would be 130 “N” values to combine. Once the trader adds the 130 numbers together, they need to divide the number by 130 to get the ADR over six months.
As you would expect, the numbers in the formula fluctuate according to the number of days that the trader wishes to take into account.
The best way to complete this type of larger ADR calculation is with a spreadsheet or with a Forex trading platform. Many trading platforms offer an ADR indicator, which makes the process much easier than doing it manually.
The trader simply needs to select the time period they want the ADR for, and the indicator will do all the calculation work and spit out a number.
How To Read The ADR Indicator
Reading an ADR indicator chart is quite simple. ADR charts are straightforward and to the point. Many indicators will display an additional text with the output values on the chart after the trader applies the indicator, which tells you the ADR.
Depending on how the trader sets the indicator settings, the chart may appear slightly different than other charts or indicators. The way the trader reads the pip value may differ based on the variations in settings and the specific ADR indicator, and the forex platform.
The average daily range indicates the average pip range of a currency pair throughout a particular period of time, such as 10, 20, or X number of days. It is a valuable tool for forex traders. They can use it to help prevent huge losses and maximize their profits.