The ADR (Average Daily Range) And How To Use It
The ADR (Average Daily Range) is sometimes called the ATR (Average True Range) depending on your platform but don’t worry THEY ARE THE SAME.
The ADR is an indicator that does a simple calculation of the average movement of price within a day over a number of days (or periods). So when you open the indicator, the default setting will be 14 on most ADRs but you can definitely change it.
Side note – I’ve never really understood why 14 but I guess the creator wanted to keep track of 2 weeks but the Forex markets are only open 5 days a week, so it should actually be 10 (but that’s not important).
What is important is the purpose of the ADR, the ADR gives the kind of price movement expected within a day of trading.
I’ll explain why that’s important but using the ADR (Average Daily Range) you can judge how much price is LIKELY to move in a particular trading day which can help you set stops as well as targets. Let’s acquaint you with the look of the ADR.
ADR – Example 1
In the above example, we have a clean Daily chart with the indicator on the chart. On my MT4 it’s called the ATR (Average True Range) and like I said at the beginning of this article. It doesn’t matter what your platform calls, it’s the same thing.
In Example 2 which you are about to see, I highlight the “14-period” parameter and the current value of the ADR. That’s the parameter you can change. The period parameter changes the number of days (periods) taken into account when calculating the average price movement.
Now, I want to be clear… When I say Days (Periods) I mean candles. The ADR judges the probable movement of a single candle. If we’re on the daily chart, we have an idea of how much the price will move in ONE day.
That doesn’t mean it only counts the DAYS, don’t be fooled by the name, you can easily calculate the average weekly movement. HOW? By running the indicator on the WEEKLY Timeframe. Running it any lower might not be of any use because the size of the next 15-minute candle is none of your business.
ADR – Example 2
In Example 2 the “0.0082” value is important to read properly. You’ll see to the very right of your chart that price has 5 zeros so “0.00000” and the current price of EURUSD is “1.16068” which means the ATR value is absolute pips. Understand this…
“0.0082” = 82 pips.
“0.00820” = 82 pips = 820 ticks.
So what the ATR (Average True Range) is telling you is that CURRENTLY, you can expect the LOW and HIGH of any given day to be around 82 pips (based on recent volatility).
Changing the period, making it lower or higher, will either give you a sharper and quicker line or a smoother and slower line. If you want to experiment and change the settings according to your strategy, at least now you know why you would make certain changes and how to get the desired result from the indicator. Now the fun stuff!!
How to Use the ADR in your trading
If we assume you use the ADR/ATR (SAME THING!) to calculate DAILY averages then we can proceed to think about it in the following way…
A trade set up occurs on the H1 (1-Hour Timeframe) and you determine where your stop needs to go, looking to establish your R:R (Risk Reward ratio), you can use the ADR to determine if that trade is even worth taking.
If a buy setup occurred toward the high of the day, the ADR says 80 pips and the low of the day is 60 pips away, that means you’ve got around 20 pips or so left of gas that day which means you’ll probably have a low R:R on that trade… so skip it.
A trade set up occurs on the H1 (1-Hour Timeframe) and you know where your stop needs to go and you’re looking for a good R:R.
Say the ADR reads 80 pips, your buy setup is towards the lows of the day and the highs of the day are 10 pips away, then you already know that you’ve got roughly 70 pips of ROOM for the trade to run if it goes in your direction. When it gets there you can take partial profit or take your position off.
A Trade set up occurs on the DAILY Timeframe and you’ve got a target in your head or on the chart. You need to determine a point at which you want to get out of the trade if you’re wrong (because you can be).
The ATR reads 80, you decide that if price goes more than 80 pips from my entry then I must be wrong, you would using sound logic because if price did going to go your way, it is not going to move against you by the daily average and then continue in your direction.
At that point, the market would be “out of gas” so to speak, for that day anyway. Most people use 1.5x the value of the ATR (Average True Range) to set a safe stop that still gives the market room to breathe.
- In Scenario 1, we cover how to use the ADR (Average Daily Range) to avoid potential losses in the market and be more selective with our trades.
- In Scenario 2, we cover how to use the ADR to set potential targets and find out your potential R:R (Risk Reward ratio).
- In Scenario 3, finally, we cover how to use the ADR to set appropriate stop losses that still give the market room to breathe and a firm place to know that you are in the wrong trade.