Forex trading is considered by some people as a rather difficult task, particularly, analyzing the market, to place trade positions accurately. Forex trade Indicators have immensely assisted in making accurate market predictions. Traders have always sought Technical indicators which are user-friendly and quite effective in making profitable trade decisions. Average Daily Range Indicator is one of those custom technical indicators created for the MetaTrader4, MT4 trading platform. Today we will discover iff this one makes our Best Metatrader Indicators page or not.
As suggested by the name, the ADR Indicator (Average Daily range) shows the average range of security within a timeframe. It is really helpful to traders who make use Bollinger bands, the Relative strength index or momentum oscillators.
What is the Average Range Indicator?
The average daily range is a particular average of the day by day range of security. This particular Indicator was specifically created for the Foreign exchange markets. It is a simple indicator that provides information on a pair of currency’s daily volatility. Intraday traders find volatility data very helpful in placing trades. It is also written in short form as ADR Indicator or simply ADR.
It is a veritable means of understanding and viewing a particular security’s volatility. Founded on the security’s average daily range, one can identify its current range and thereby inform if the markets are displaying a range lower or higher than the observed average daily range. Ideally, if the ADR is going higher than its average daily price range, it implies that there is increasing market volatility.
A valuable tool for trading reversals
Also, an ADR reading lower than the average daily price range might indicate declining volatility of the market. The Average Daily Range Indicator could be a valuable tool in ascertaining intraday trading reversals. It is usually calculated using the average daily range of the previous periods.
This implies that if the lookback period is set at a high value, the average daily range can be much more lagging. Nevertheless, setting the lookback period of the ADR would turn it to be more volatile.
For instance, if one notices that the price movement for the previous five daily sessions was uniform, this is displayed by the Average Daily Indicator showing smaller figures. However, if the volatility increases, based on a strong bearish or bullish candlestick, one can expect that the past range was broken.
ADR can be helpful in this aspect. Nonetheless, the ADR indicator only drafts the average daily range as a mathematical comment on the Meta Trader 4, MT4 trading charts. The Indicator drafts two (2) horizontal lines indicating the past average daily range.
Hence, if the price is likely to break out from these levels periodically, expect the trend to start again. Most traders understand that momentum is a sign of a trend. The trend seems to happen when momentum rises. As a result, the ADR can be valuable in this aspect to display the previous average range.
A trader can go ahead and compare the past values to the present daily range to determine what the momentum is. The Average Daily Range Indicator can be useful if one is trading the corrections in the trend or trading breakouts. It is also applicable in long term charts.
Calculating the Average Daily Range Indicator
Obtain the distance between the daily lows and daily highs of a pair of currency. The Average Daily Indicator is customizable, and you can organize it to take into thought as many periods as possible. The following is a case of the workings of the ADR calculation:
If we adjust the ADR indicator to consider five (5) days. The range (distances) between the lowest and highest point of all of these days are listed below:
n1 = 56 pips
n2 = 27 pips
n3 = 78 pips
n4 = 30 pips
n5 = 42 pips
The Average Daily Range calculator formula will be:
ADR = (n1 + n2 + n3 + n4 + n5) / 5
Applying the actual values to the formula will be:
ADR = (56 + 27 + 78 +30 + 42) / 5
ADR = 233 / 5
Then ADR = 46.6 (approx. 47)
When more periods are considered, more “n” values will be used, and this will produce a higher divisor in the formula. Say you use a 1-year period for the ADR. This would translate to 260 “n” values in the ADR formula since there are fifty-two (52) trading weeks in one (1) year and five(5) trading days in a week (52 x 5 = 260). Therefore, you will add 260 “n” figures, which you will use to divide by 260.
Luckily, we don’t need to manually do this, as the ADR indicator in your MT4 trading platform will execute this task (calculation). You are required to pick the period input you desire the ADR Indicator to consider.
Interpreting the ADR Indicator
The Indicator has a particularly simple output, and in the majority of cases, you will see an added text with the output figures on your chart after applying the Indicator. It should display a number for the n-periods ADR figure.
From the chart above, we have a daily EUR/USD Forex pair chart in the MT4 platform. The ADR indicator is attached to the chart, and two values can be sighted here. The first is displayed with the orange arrow, which is the 15-period ADR, while the second is displayed with the red arrow which is today’s (last bar) ADR value.
The 15-day ADR Indicator shows the value as 1165. This figure translates to 116.5 pips while today’s (current bar) ADR value displays 528, which translates to 52.8 pips.
Regarding our example, the average daily move of the EUR/USD for the last fifteen (15) days is 116.5 pips. However, for today the EUR/USD only moved with 52.8. What it implies is that the EUR/USD pair has been relatively silent today so far. This can be useful information to the trader irrespective of his trading strategy.
ADR Trading Strategy
It can be applied to:
Enter (Open) an ADR Trade
Let’s consider two cases, which are
a) The first instance is when the price movement breaks through the lower or the upper level of the daily range. This permits opening a trade in the track of the breakout.
b) The second instance is when the price movement reaches the lower, or the upper level of the daily range, and rebounds from it. This allows placing a trade in the direction (track) of the bounce.
ADR Positions Stop Loss
When you trade an ADR breakout, it is advisable to use your price action knowledge to place your stop-loss in a reasonable place. A similar strategy is advised if the range breakout is bearish.
Assuming the price action rebounds from one of the ADR levels and you trade in the direction of the bounce, stop-loss order would be placed away from the swing formed by the price bounce.
Taking Profit with the ADR Indicator
When the historical ADR of a Forex pair is, say 80 pips, and price movement for the day has approached this range, then it would be advisable to consider trailing your stop a bit closer on the notion that the price swing has likely reached its boundary for the day.
Closing Remarks On Average Daily Range Indicator
The Average Daily Range Indicator is a custom indicator for MT4 platform which shows the average pip range of a pair of currencies over a definite period.
Calculating the ADR involves:
• Obtaining the daily low and high of every trading day for a particular period.
• And then add the distance between each daily low and high, and divide it by the number of periods.
The Indicator is useful in taking trading positions; however, it’s pertinent to add that this should not be used alone. Combining the use of this Indicator with other tools and strategies will make for well-informed trading decisions.
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