The forex market is fast. Prices move up and down in seconds. Traders need a way to measure these movements and how far prices could potentially travel in a day.
Enter ADR - Average Daily Range. ADR is a simple statistic that tells traders how much the price moves across the day. Specifically, it measures the average distance between the daily high and daily low price taken over a number of specified days.
Even the smartest forex traders will use the ADR measure to set potential profit targets, establish stop losses, and manage risk. You'll learn everything there is to know about ADR, including what ADR is, how to calculate ADR, what to do with ADR in your trading, and how to apply it in your trading plans.
This article organizes these learning goals into clear headings and sections to maximize your learning. We will first cover some basic definitions so we have enough knowledge to do some calculations eventually. Then we will explore and perform calculations with our data. We will then examine some trading strategies with ADR. We will also locate ADR among other similar indicators and evaluate its worth potentially. Finally, after reading this article, you will know exactly how to go about adding values of ADR into your results when you trade forex.
What is ADR?
ADR, or Average Daily Range, is a measurement of the average price movement of a currency pair on an average day. Traders generally take the ADR reading for a particular currency pair over a number of periods or days. The most common timeframes traders will look at are 14 periods or 20 periods.
This means EUR/USD moves, on average, 85 pips per day. Traders will then use this figure to project a workable basis for their expectations regarding a realistic price movement. Using this information traders will better understand that the currency pair may move about 85 pips in either direction.
You can think of ADR as keeping track of your daily step count. As you walk, each day is different in total for number of steps. but if you continue day after day, eventually you have an average of steps. If you average 8,000 steps when you wake up tomorrow you expect the same amount of steps (on average) the next walking day. ADR behaves the same with regard to currency price.
Why Is ADR Important for Traders
ADR is important for traders in several different ways. First, ADR helps traders set reasonable targets. If EUR/USD has an ADR of 80 pips, trying to target 200 pips might not be realistic for one day. Targeting 60-70 pips makes sense, and you know it can realistically move that much.
Second, you can use ADR to help you with stop losses. If a pair has an ADR of 100 pips, a 20-pip stop loss might be hit by normal price noise. A 40-pip stop loss gives the trade a little room to wiggle.
How to use the ADR in trading strategies
The ADR begins as a simple statistics trading tool, and when use correctly, it can very useful to the, well, the smart trader.
If GBP/USD has a 85 pip ADR, you could target 70 - 80 pips as a legitimate target, whereas a target of 150 pips isn't likely to be valid as a legitimate target at the same time. When making targets or setting expectations, traders are not only significant of the ADR data that is provided, as well as the average price movement on GBP/USD on faster time frames.
The ADR is meant to indicate the distance you should be setting the stop loss. All else being equal, a 25-pip stop loss should be fine for a 50-pip ADR pair. However, that same stop loss would get obliterated on a 120-pip ADR pair. We want to have the stop loss correspond to the pairs normal volatility.
Conclusion
The Calculated ADR provides much transformation to forex trading, moving from instinctive guesswork to informed decision-making. This metric provides important context of volatility for every trading decision.
By understanding how to calculate ADR traders will be empowered to make further alterations to their own analysis. A trader may be able to reflect contrasting characteristics of the market by analysing ADR over different time periods. Updating ADR will also lead to better context for recurring volatility measurement relevance.
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