Average Daily Range (ADR) indicator

 

Review of Average Daily Range indicator

The Average Daily Range indicator (fig. 1) shows the price change between the maximum and the minimum, in other words, the average asset price volatility for a certain period of time.

Average Daily Range indicator for Forex trading

Fig. 1

This Forex indicator is applied especially effective in intraday strategies for forecasting price movements in the near future. ADR is often used to determine the purposes of trading on Forex, as it shows the market situation quite accurately.

Average Daily Range is calculated by a simple formula, in points from the lowest to the highest price for a period of time. According to the formula, the data of price dynamics for each day of the week are added up (for example, 100 points on Monday, 20 points on Tuesday, 154 points on Friday) and the amount is divided, in this case, by the number of trading days, 5. The result of calculations is shown on the information panel on the price chart.

The indicator on the chart is presented in the form of several price levels, two of which the most important are the ADR boundaries. They show the range in which the asset price moves, which allows you to calculate the future price. The rest of the A levels are additional, weekly.

The levels are calculated and set according to the formula, in which ADR is added to the average price range per week for a trading month (20 days) and the closing price of the last trading day, Friday, is deducted. This level is called week high. If the sum of ADR for the week and month is divided by 4 and the closing price of Friday is added, then you will get the value of the week mid high level, if the price of Friday is subtracted, it will be the week mid low level. Other levels of the indicator may be benchmarks for more distant targets, as well as to perform the functions of resistance and support, but, nevertheless, to conduct strategies that imply the breakthrough of these lines, it is impossible.

It is believed that if the price of an asset has reached one of the levels, it is possible to close the deal if it was opened. In this case, if the position is not open, and the price approaches one of the indicator lines, the position is no longer opened. Also, it is not recommended to buy in the upper and sell assets in the lower limits of the range of the indicator under consideration. When placing positions to buy, it is necessary to focus on the maximum daily range, and when placing positions to sell, it is necessary to proceed from the minimum daily range.

In the lower part of the indicator there is a sheet (fig. 2), an auxiliary information window, in different variants of the indicator it can display a different volume of information, but in any case it is marked here the extrema of the price during the period, ADR values, trading periods.

Average Daily Range on a chart

Fig. 2

In fact, Average Daily Range is a calculator to determine the average daily range, it does not require any special conditions for its use, it is used on any assets, on any timeframes.

Starting to work with this Forex oscillator it is necessary to specify, on what time indicators of current day are calculated, it matters at work with the Asian platforms or the European ones.

Sign in by broker’s terminal, add the Average Daily Range indicator to the chart, and see what happens

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Average Daily Range indicator in MetaTrader 5 platform

Average Daily Range is not included in the list of standard indicators of trading terminals. For MT5 this indicator and its several varieties are available in the «Market», for example, at the link that leads to the «Market» directly in the terminal, from where it is loaded into the navigation panel on the left.

Among the ADR settings it is necessary to note ADRPeriod – the period of price dynamics calculation in days; PrecalculateDays – support and resistance levels for certain days are shown; ADRZonePercent – the width of the zone against the price dynamics.

You can also adjust the colors, and since the visual component is important in the interpretation of A’s values, it’s quite a serious point. The colors of StatiHighColor statistical resistance and StaticLowColor support levels, SchowDynamicLevels dynamic resistance levels and DynamicLowColor dynamic support levels are adjusted. You can also make some adjustments to the ShowInfo panel display.

To be noted that ADR does not have a single form, in different terminals you can see its different types, the information content can be different depth and volume. For example, the main tool in the indicator considered is located at the bottom left of the chart. There are two values in it (fig. 2) – the upper one shows ADR for a certain period of time, used in the strategy, and the lower one shows today’s ADR value. A small difference between the values shows a low volatility, while large values show a corresponding increase in volatility.

Other types of ADR indicators usually place a sheet with a large number of variables on the chart. In addition, the existing types are updated and may differ in functionality from the «old» versions, this shall also be taken into account. Many sites that tell about trading Forex strategies contain links to the ADR indicator loading files. When downloading files from third-party sources, you should first of all make sure that they are safe.

 

Average Daily Range indicator signals

ADR can be used for the fast, «by eye» assessment of the daily price movement. If ADR marks the indicators above the average, it means that the volatility is high and it is the Forex signal itself to look more closely at the dynamics of the currency pair. For example, if the ADR average price range of the pair is over 80 points, it may be worth counting on higher targets.

It is also actively used as a tool that gives an answer to the question of whether it is necessary to hold a position further or better to withdraw from the trade. And this information will be useful in the implementation of many trading strategies. ADR can be used in reversal strategies, because if the price reaches its upper limit, you can expect a rollback. The ADR indicator is often used in strategies based on the flat movement clearance.

ADR is suitable for timely setting of stop-losses, take-profit (taking into account the averaged values). At the same time, A is not very suitable for determining market entry points. A shows good results mainly in active positions. Although, based on its indicators, it is possible to determine in which direction it is possible to conclude deals.

The ADR indicator is especially useful for precise determination of the exit point. This is not always possible, especially for novice traders, because, having incorrectly defined the range of prices, they set too small goals and leave the position too early, or, on the contrary, overestimate their capabilities and leave the market untimely. This is especially essential for intraday strategies and scalping. The benefit of ADR in this case is hard to overestimate.

 

Trading strategies based on Average Daily Range indicator

Average Daily Range is not often used in trading as the main or additional indicator when implementing intraday strategies. But there are many variants of strategies based on this indicator only. ADR is also used in various rare strategies with non-standard tools. For example, such a strategy is used when trading currencies with small spreads at the beginning of the European session, provided that no events are expected that could dramatically change the price dynamics.

Pending buy orders are set at several points above the daily maximum of the previous day, and for sale – below the minimum of the previous day. Stop-losses and Take Profits are set depending on the points of ADR indicator. If the orders are not closed, they are removed and new ones are placed.

One of the features of the average daily range is its uniqueness for each market. And this feature is used to predict the future price with high accuracy. According to this strategy, traders mark the distance of price movement during the trading period and assume that the asset will repeat its path in the future. This feature can be used in trading, although this strategy is implemented infrequently and is not recommended for newcomers.

The ADR indicator is used in a fairly popular strategy «RenkoSwing», which is implemented on the Renko charts. Renko can be downloaded for MT4 and MT5 and set as indicator (fig. 3).

Average Daily Range in RenkoSwing Strategy

Fig. 3

Recall that the Renko chart shows the price dynamics in diagonal rows of rectangles, which are measured by points. The price growth is shown by a new rectangle, in this case blue, which is located to the right of the previous similar rectangle. The price decrease is demonstrated by placing the new rectangle below and to the right, in this case red. The chart is constructed in such a way that the new price value is compared with the extrema of the previous rectangles.

In the «RenkoSwing» strategy, the scalping one, the indicators SMA with the period 50 are used on Renko chart (fig. 4), Stochastic with the settings 15, 5, 5, EMA with the period 5 and SMA with the period 8, ADR indicator with the period 60.

Trading strategies based on Average Daily Range

Fig. 4

ADR is necessary to determine the limits of volatility, SMA is used for determination of the trend direction, the Stochastic indicator is required to define the entry points, EMA and SMA show the entry points and this is where they are assisted by ADR. The strategy is implemented on a timeframe.

The signal to buy is the price placement above SMA with the period of 50, Stochastic goes out of the oversold zone, EMA crosses SMA (8), ADR shows the maximum value. The signal to sell will be a mirror position, but the ADR indicator shall also have the maximum value. In addition, the settings of this indicator should be adapted for each pair being traded.

 

Summary

One of the advantages of Average Daily Range is that it is very informative, applied on any timeframe and on any asset. It allows you to set goals during the trading day, with the help of which you can easily determine the direction of opening positions and areas of support and resistance.

It is optimal to determine the trading exit points by considered indicator. ADR can be especially useful for placing protective orders, allows you to visually adapt the data to work most comfortably for any trader. Thus, the ADR indicator is probably appropriate for any indicator strategy.


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