Forex Trading Using Average Daily Range

by

Vic N

During a normal trading day in the forex markets, price is going to move up and down, and will generally (although not always) make a move above the previous days high, or below the previous days low. And if you think about it, wouldnt it be useful to have a general idea as to how far price could be expected to move?

Being aware of the Average Daily Range of a pair can be very useful. And by the way, the Average Daily Range (ADR) is also called the ATR (Average True Range) in the forex markets.

An in the forex markets they both mean the same thing and can be used interchangeably, but in other markets like commodities and stocks, there is a difference, but we dont need to worry about it. ADR or ATR is the same thing for our purposes.

When you calculate the Average Daily Range of a currency pair, obviously you can use as many days as you like for calculating the average. What Ive found useful for the purposes of day trading, is a 5 day average.

By observing the average daily range for the past 5 days, we get a good gauge of current price movement and volatility, in other words, how far we can expect price to move during the day, from the low of the day to the high of the day (or vice-versa).

For example, if today is the start of Wednesday, and were looking at a particular currency pair, what we do is look at the 5 day ADR as of the close of Tuesday. Make sure you get that. We dont use the current days candle because the day is not over and we dont know what its range will be, right? So coming into Wednesday, all we know is the Average Daily Range as of the close of Tuesday.

So lets suppose we see that the 5 day ADR is 152 pips as of Tuesdays close. That means that we can expect the current days high (Wednesday) to be about 152 pips above the low, or the current days low to be about 152 pips below the high.

So staying with our example, once we know what the ADR is coming into Wednesday, we simply observe price and watch for that price level where price will have traveled and amount equal to or exceeding its current 5 day Average Daily Range.

If price is rising, then note the low of the day, and add the ADR of 152 pips to get the expected high for the day

If its dropping, then simply note the very high of the day, and subtract the ADR of 152 pips (in our example) to get the expect low for the day.

This is tremendously useful information, and heres why: If price has, for example, rallied above its expected high (its 5 day Average Daily Range), and at the same time price is hitting a support or resistance level, there can be some great trading opportunities!! I mean, really great! And there are even further refinements that you can make to give you some extremely high odds trading opportunities.

So, I hope you are starting to get a bit of an idea as to just how powerful the observation of the 5 day Average Daily Range can be when you learn how to apply it properly.

I hope youve found this article helpful!

All the best,

Vic Noble

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After more than 30 years of trading, 5 1/2 years as as a futures broker, and a personal forex coach since 2006, I’ve had a unique opportunity to see what separates winning traders from losing traders. I’ve just loved helping so many people achieve success, and I know I can make a positive difference for anyone. http://www.forextradingandeducation.com/wp/free-fx-training/

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