8/26/2020 Using ADR (Average Daily Range) to Find Short Term Trading Opportunities - Forex Training Group

Using ADR (Average Daily Range) to Find Short Term

Trading Opportunities
F FOREX TRADING ARTICLES

In today’s lesson, we will discuss a very simple but highly useful tool that can
provide valuable information to the trader. The indicator I am referring to is
called Average Daily Range (ADR), which provides data on a currency pair’s daily
volatility. We will discuss how to use ADR to find hidden support and resistance
areas on the chart, and how we can generate short term trade signals from these
levels.

Download the short printable PDF version summarizing the key points of
this lesson….Click Here to Download

Average Daily Range of Currency Pairs

The Average Daily Range shows the average pip range of a Forex pair measured
over a certain number of periods. Traders can use the ADR to visualize potential
price action outside the average daily move. When ADR is above average, it
Confessions
means that the daily volatility is higher than usual, which implies of
that the A Forex Trader... ×
currency pair may be extending beyond its norm. .....Get Valuable Lessons From a Forex
Pro....with Actionable Tips on How To
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The ADR can be helpful in setting targets for positions youDiscover How To Avoid
are currently in asCommon Pitfalls
that Most New and Aspiring Forex Traders
makean
well. For example, if the ADR shows you that a Forex pair has when Startingdaily
average Out...Sign Up Below....

range of 85 pips, then it might be wise to tighten up your target

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has achieved or is close to this expected range.

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The ADR is also useful for trading intraday reversals. For example, if a currency
pair reaches the top of a daily range, then it could be due for a reversal, and you
could consider a mean reversion strategy to capture a potential retracement.

Average Daily Range Indicator

Before we dive into how we can use the
ADR to trade, we should take a moment to
understand the composition of the
indicator. The indicator has a very simple
and easy-to-understand formula, which
will be discussing next.

How to Calculate ADR

The calculation of the daily range of a
currency pair is a relatively easy process. You simply take the distance between
the daily highs and daily lows of a currency pair. The technical indicator is fully
customizable, and you can configure it to take into consideration as many periods
as you want. Let’s see an example of how the ADR calculation works:

Say that we adjust our ADR indicator to take into consideration five days. The
distances (range) between the highest and the lowest point of each of these days
are:

n1 = 56 pips
n2 = 27 pips
n3 = 78 pips
n4 = 30 pips
n5 = 42 pips

The ADR calculator formula is as follows:

ADR = (n1 + n2 + n3 + n4 + n5) / 5

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ADR = (56 + 27 + 78 +30 + 42) / 5 make when Starting Out...Sign Up Below....

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ADR = 233 / 5
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ADR = 46.6 (approx. 47)

The more periods you take into consideration, the more “n” values you will have
and the higher the divisor in the formula will be. So, let’s say you take a 1-year
period for your ADR. This would mean that you will have 260 “n” values in the
formula, because there are 52 trading weeks in a year and five trading days in a
week (52 x 5 = 260). This means that you will add 260 “n” values, which you will
need to divide by 260.

Fortunately, you do not need to manually

do this yourself, because the ADR
indicator within your trading platform will
perform this calculation. The only thing
you are required to do is to select the
period input you want the ADR to take into
consideration.

Reading the ADR Indicator

The ADR indicator has a very simple
output and in most cases, you will see an additional text with the output values on
your chart after you apply the indicator. The ADR indicator should show you a
number for the n-periods ADR value.

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Above we have a daily chart of the EUR/USD Forex pair within Pro....with
theActionable Tips on How To
MT4 platform.
Identify the Best Setups in the Market, and
We have attached the ADR indicator to the chart. AlthoughDiscover How To
you might notAvoid
seeCommon
the Pitfalls
that Most New and Aspiring Forex Traders
make
tool, it is right there at the top left corner of the chart. It has when
been Startingwith
marked Out...Sign
a Up Below....
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There are two values there. The first one shown with the orange arrow, is the 15-
period ADR, and the second one shown with the red arrow is the today’s (last bar)
ADR value.

The 15-day ADR shows the number as 1165. This value corresponds to 116.5 pips
and today’s (current bar) ADR value shows 528, which corresponds to 52.8 pips.
Keep in mind that based on your chart settings and particular ADR indicator, the
manner in which you read the pip value may differ.

Back to our example, the average daily move of the EUR/USD for the last 15 days
equals 116.5 pips. But for today the EUR/USD has only moved with 52.8. This
means that the EUR/USD has been relatively quiet today thus far. This can be
valuable information to the trader regardless of the strategy employed.

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Building the ADR Range

To build the current ADR range, you need the current daily low and daily high. To
find the upper and the lower level of the ADR range on the chart, you would need
to apply the ADR value as follows:

To build the upper ADR level, you would need to apply the ADR value
upwards starting from the daily bottom.
To build the lower ADR level, you would need to apply the ADR value
downwards, starting from the daily top.

These two steps are shown in the image below.

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We have a 15-day ADR indicator on the chart above. The 15-period ADR value is
1028, which corresponds to 102.8 pips. When we apply the 102.8 pip distance
starting from the daily high and the daily low, we get the two red dotted lines you
see on the image.

In our case, we are using a more advanced ADR indicator, where the upper and
the lower level of the range are plotted automatically. Depending on the ADR
indicator you use, you may or may not have certain functions.

ADR Indicator for MT4

Unfortunately, the ADR indicator is not included
in the default MT4 platform as of this writing.
You will probably need to download and add the
indicator manually to the platform if you are
using Metatrader.

Before you can add an ADR Indicator to your

chart within Metatrader, you would first need to
find a version of the indicator online. You should
be able to find one within the MQL4 community.

After you have located one that suits your requirement, you would need to
download the .mql file of the indicator, and save it somewhere on your computer.
Make sure you remember where you have saved the file, so you would be able to
find it afterward.

Then you need to open your MetaTrader 4 platform. Go to File>Open Data

Folder. You will see a standard folder window popping up on your screen. In the
folder, you need to go to MQL>Indicators. This is where you will drop the .mql
file of the Average Daily Range indicator.

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After you do this, you will need to re-launch your MetaTrader4 terminal.ofWhen
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you open the platform, you will need to go to Insert>Indicators>Custom. You From a Forex
.....Get Valuable Lessons
Pro....with Actionable Tips on How To
should be able to see the newly added ADR indicator there.Identify
Makethesure
Bestto modify
Setups in the Market, and
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any preferences before you add it to your chart. that Most New and Aspiring Forex Traders
make when Starting Out...Sign Up Below....

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After you have applied the ADR to your chart, you can utilize it in several different
ways based on your personal trading style. We will take a look at an example of
how the ADR can be applied as a trading strategy.

Enter an ADR Trade

We will consider two cases when the ADR indicator is useful for opening trades.

The first case is when the price action breaks through the upper, or the lower level
of the daily range. In this case, you might want to open a trade in the direction of
the breakout.

The second case is when the price action reaches the upper, or the lower level of
the daily range, and bounces from it. In this case, you may consider a trade in the
direction of the bounce.

Stop Loss on ADR Positions

Always use a stop loss order when trading with leveraged instruments. If you
trade an ADR breakout, it will be best to use your price action knowledge to
position your stop-loss in a logical place. The same is in force if the range
breakout is bearish.

If the price action bounces from one of

the ADR levels and you trade in the
direction of the bounce, your stop-loss
order should be placed beyond the
swing created by the price bounce.

Take Profit with the ADR

Indicator
The ADR indicator can be a useful
guide and provide a better picture of
Confessions of A Forex Trader... ×
the potential you have with your
.....Get Valuable Lessons From a Forex
trade. For example, If the historical Average Daily Range ofPro....with
a ForexActionable
pair is 80
Tips on How To
Identify the Best Setups in the Market, and
pips, and price action for the day has come close to reaching this range,
Discover How To then it
Avoid Common Pitfalls
would make sense to consider trailing your stop a bit closerthat
onMost
the New and Aspiring Forex Traders
assumption
make when Starting Out...Sign Up Below....
that the price move has likely reached it limit for the day.
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Now let’s look at an example ADR trading strategy. In the image below you will
see a chart with the daily ADR indicator.

This is the H1 chart of the USD/CHF Forex pair for Dec 13 – 14, 2016. The image
shows the ADR indicator values at the top left corner. The ADR is adjusted to take
into consideration 15 days. The two blue horizontal lines are the upper and the
lower level of the Average Daily Range. The ADR indicator we use here allows us
to automatically plot the upper and the lower level of the ADR.

The black arrow points to the beginning of the trading day. As you see, the price
action starts a gradual move toward the lower level of the daily range. Suddenly,
the price approaches the lower level of the range and touches the level. A bullish
bounce appears afterward.

Furthermore, a candle resembling a Hammer Reversal Candle or Pin Bar has

formed. When a candle closes above the high of the Hammer, you could buy the
USD/CHF on the assumption that the price is likely to increase based on the
weight of evidence that we have been thus far.

At the same time, you would want to place a stop-loss order below the lower ADR
level, from which the price bounces from. This is shown with the red horizontal
line on the chart. Your trade is now protected.
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The target for this trade is the upper ADR level. Therefore,Pro....with
you should hold Tips
Actionable the on How To
Identify the Best Setups in the Market, and
trade until the price reaches close to this level. When this happens,
Discover HowyouTohave
Avoid two
Common Pitfalls
options: to close the trade and take your profit or hold the that
tradeMost New and Aspiring Forex Traders
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breakout occurs.
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In this case, there was a breakout through the upper level of the ADR. SIGN UP

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Trading Outside the Average Daily Range

Now let’s dissect another trading example using the ADR Indicator.

This time we have the H1 chart of the USD/CAD. The trading day starts with a
slight price decrease where the price reaches the lower level of the ADR indicator.
After touching the lower level of the ADR indicator, the price bounces in a bullish
direction. The bounce at this ADR support zone implies that the area is likely to
hold and we are probably witnessing a reversal. Therefore, you could buy the
USD/CAD Forex pair on the assumption that price is likely to rise from this level.

You should also place a stop loss order below the lower level of the ADR. This way
your trade will be protected from unexpected events.

As you can see, the price action increases afterward. The increase is relatively
sharp. Soon thereafter, USD/CAD breaks through the upper level of the ADR
indicator creating further bullish potential.

Based on the strong momentum breakout and continued momentum, you can
hold the trade further on the assumption that the price action is currently
entering a bigger trend.

But if you decide to stay in the trend for further gain, you should move your
Confessions of A stop
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loss order. You should adjust the stop so that it is located below the upper level of
.....Get Valuable Lessons From a Forex
Pro....with
the ADR. Also, take into consideration the last candle bottom which Actionable Tips on How To
is located
Identify the Best Setups in the Market, and
inside the ADR horizontal channel prior to the breakout, asDiscover
we haveHowdone on Common
To Avoid the Pitfalls
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image above. make when Starting Out...Sign Up Below....

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Then you should hold the trade at least until the end of the trading day, or until
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Download the short printable PDF version summarizing the key points of
this lesson….Click Here to Download

Conclusion
The Average Daily Range is an indicator that shows the average pip range of
a currency pair over a specific period of time.
To calculate the ADR value, you need to:
Get the daily high and low of every trading day for the specified period.
Add the distance between each daily high and low, and divide that by
the number of periods.
The ADR indicator is a very simple and easy-to-use trading tool. Its output is
just two values that are usually plotted on your chart:
ADR over specific period
Current Daily Range
To build the range of the ADR indicator, you would need to apply the ADR
value from the daily low (extending above) and from the daily high
(extending below). This will provide the two levels of the ADR Range.
To add the ADR indicator to your MetaTrader4 platform you need to
implement these steps:
Find the .mql file of the indicator you would like to use
Download the ADR Indicator.
Open MT4 and go to File>Open Data Folder.
Go to MQL>Indicators and paste the downloaded .mql file.
Restart your MT4 platform.
Go to Insert>Indicators>Custom and choose the new ADR indicator.
ADR Trading Strategy:
Enter a trade when the price action breaks the ADR range and enter in
the direction of the breakout. Also, enter a trade when the price action
bounces from one of the ADR levels. In this case, you enter in the
direction of the bounce.
If you trade a breakout, put a stop beyond the broken level. If you
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a bounce, put a stop beyond the created swing level, from
.....Get which
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price action bounces from. Identify the Best Setups in the Market, and
If you are trading a breakout, stay in the trade atDiscover How the
least until To Avoid
end Common
of Pitfalls
that Most New and Aspiring Forex Traders
the trading session, or until price action providesmake when Starting
contrary signals.Out...Sign
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you are trading a bounce, try to stay in the trade until

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yourprice action here...
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