Day Trading The Forex Market With The Average Daily Range
The average daily range is a nice tool (or maybe better said, just a useful statistic) that’s most practical for day-trading the Forex market, although it’s definitely also useful for other trading styles like scalping or swing trading.
The average daily range (ADR) can be calculated manually, you may use an indicator to do that, or even an already built -in indicator in Metatrader like the Average True Range (ATR) can show you this. Only if you are using the ATR, remember to switch to the daily timeframe because the ATR shows the average range for the timeframe it is plotted on. And, for what we’ll discuss here, we need the average ranges of the daily candles.
Essentially, the average daily range is an average calculation (in pips) of how much a pair moves in a day which is the distance between the high and the low of the day. This can be calculated based on the past 10, 20, 30, days or whatever specific number the trader prefers. Nonetheless, a similar result is produced in either case.
An easy way to automatically calculate the ADR for your charts is to use an indicator or tool in your platform that can specifically do that. For Metatrader you can find free indicators that will calculate the average daily range and display it in one of the corners on the chart.
Why is the ADR useful?
Basically, there are many ways in which the average daily range information of a pair can be used to help you make better trades.
The market can achieve its average daily range in 3 ways:
- It can open low and close near the highs, therefore offering a great bullish opportunity on the day
- It can open high and close near the lows, which would give bearish opportunities
- Or, it can open in the middle, go up and down during the daily session and close somewhere in the middle of the candle
In all 3 scenarios, trades can be entered at better levels and profits can be maximized by using the average daily range statistic to get in at good technical levels.
Here are some of the ways in which the ADR can be used to maximize profits in the Forex market.
Determine better profit targets and better stop loss levels
There is no point in holding a day-trading position beyond the average daily range of a pair, either in the positive (profit target) or the negative (stop loss) direction!
The ADR statistic is particularly helpful in determining high-probability profit targets for day-trading the Forex market. For example, if the average daily range for the EURUSD pair is 100 pips then there is no point to shoot for a target of 150 pips in a day-trading position because most probably it won’t be reached.
The best way to place a target based on the ADR is to shoot for something like 70 – 80 percent of the ADR. So, if the average daily range is 100 pips then you can reasonably expect the market to have a daily range of at least 70 – 80 pips.
Similarly, there is no point to have a stop that is too wide or bigger than the ADR. Better yet, aim for a stop loss that is half the size of the profit target and the average daily range. This can be best achieved by placing the stop behind a strong technical level.
Here’s an example of using the ADR statistic in day-trading:
Using the ADR to day trade Forex - GBPUSD 1h chart
In this particular example, GBPUSD achieved around 80% of its daily range or 85 pips. The ADR was 107 pips.
Make better use of support and resistance levels
A support or resistance zone that is reached after the currency pair has already traded its average daily range is more likely to hold and/or be a point of reversal. It’s simple logic, in fact.
The average daily range statistic can be very useful to determine precise reversal points which could provide entries at near exact highs or lows. Such situations can be used to enter high probability trades that can offer great risk-reward and hefty profits.
Here’s an example on the USDJPY currency pair of what I mean:
The average daily range at that moment for USDJPY was around 80 pips.
On the candle that is marked on the chart, early in the day, USDJPY had already achieved a daily trading range of 72 pips, or just 8 pips less than its usual range.
Considering that the pair was at strong multi-month resistance, it wasn’t hard to guess that a top may be near since the pair has already run its usual distance and there was no strong fundamental catalyst that could support a major bullish breakout. Thus, it was no surprise that later in the day USDJPY reversed all its gains and, in the end, closed the daily candle in the red!
The average daily range can be used in creative ways
Similarly to combining the ADR with support and resistance levels, it can be used with chart patterns and other trading indicators. Basically, the ADR is signaling the exhaustion points for the day in a given currency pair or asset that you trade. So, there are lots of creative ways in which this information can be used.
Of course, the average daily range is not reached every day, and some days it is exceeded. However, a simple statistical fact which you can use to get the probabilities on your side is definitely very useful in a game that is all about probabilities.
Volatility changes over time and so does the average daily range, which is in fact just a measure of volatility after all. This is an important aspect to keep in mind, although average daily ranges in the Forex market are generally constant and there are rarely dramatic changes.
Still, a 100 pips move in a day may be the norm at one time, and at another time that may increase to 130 or 150 pips. Thus, a slightly different size for a stop loss or a profit target would be appropriate at the two different times.
The average daily range is a simple but powerful statistical fact that all successful Forex traders pay attention to.