Average Daily Range (ADR): Day Trading Technical Indicator | LiteFinance (2024)

The ADR indicator is based on statistical patterns. By using them, a trader can increase the potential income. The indicator shows levels in the chart where one should take profits and open new trading positions.

The article provides the indicator formula and the calculation of the ADR value for the EURUSD currency pair, as well as describes the most popular trading strategies. In addition, the differences between the ATR and IR indicators are analyzed, and recommendations for their use are given. You will learn what an average daily range is and how to apply it in Forex market analysis.

What is Average Daily Range (ADR)?

The ADR (Average Daily Range) indicator refers to the category of ATR (Average True Range) indicators and, as the name implies, displays the average daily volatility of a financial asset. Like all such technical indicators, ADR uses an averaging formula in its calculations to meet the needs of the trader.

To make an informed decision to buy or sell, you need to know how much power reserve the trading instrument has left. This is especially true for day traders since, before opening a trading position, you need to understand how many points an asset price can go up or down.

You can learn this information using the Average Daily Range indicator. It will perform the necessary calculations and show the remaining distance for the trading day as a convenient table or graphic inscription. Some versions of the indicator additionally display weekly and monthly support and resistance levels, calculated in a similar way. The indicator can be used to analyze any financial instruments.

The Average Daily Range is displayed in any timeframes, but the most useful for trading ones for trading with the indicator are M15, M30, and H1. In shorter timeframes, the overall picture of the market for the day will be lost. It will be difficult to see the average daily move in longer timeframes.

The main idea of using the ADR indicator is to assess the current market situation. In other words, it helps to determine whether it is relevant to enter a trade if the instrument has already passed a certain number of points. One can also use the indicator to set target profits.

Instruments trade within their average daily range approximately 80% of the time. During the remaining 20%, the asset goes beyond the ADR. Accordingly, it is beneficial for a trader to set daily profit targets within the average daily movement of the instrument. In this case, the trade is more likely to be exited by a take profit. Many traders set profit targets near the ADR indicator levels and choose not to trade when the price approaches the remaining 20% of the ADR.

In fact, the ADR indicator shows how many points, on average, the price of an asset can change per day by analyzing past performance. Typically, the indicator considers the previous 20 days.

The indicator performs the following tasks:

• Calculates the price ranges for the trading day;

• Defines the potential support/resistance levels (market supply and demand);

• Determines the price highs and lows;

• Draws additional support/resistance levels based on longer timeframes at the request of the trader (not all versions of the indicator);

• Spots potential take profit levels.

The ADR indicator in the MetaTrader4 trading chart:

How to calculate the ADR

Before calculating ADR, we need to define some terms:

• The price range (Daily Range, DR) is a value that the price has passed from min to max within one trading day. Note that this range is not equal to the distance between the opening and closing prices of the trading day;

• The Average Daily Range (ADR) is the price range average value for a particular number of days taken for analysis in the past. In other words, ADR is the average of DR over the period the trader chooses to calculate the indicator.

As mentioned earlier, most often, the indicator calculation period is 20. However, in some strategies for analyzing short-term trends in the Forex market, there may be a different value, for example, 5.

Let's calculate the ADR technical indicator for one week (5 business days). To do this, you need to find out the highs and lows of each day. Let's calculate the ADR for the EURUSD as of April 26, 2023.

We put the data in the calculation formula:

ADR = ((DR1 + DR2 + … + DRn) / n), where DR = |high-low|.

In our example, the formula looks like this:

1. ADR = (|1.10670-1.09641| + |1.10501-1.09657| + |1.09937-1.09377| + |1.09895-1.09332| + |1.09840-1.09172|) / 5;

2. Let’s simplfy: (1029 + 844 + 560 + 563 + 668) / 5;

3. ADR = 732 pips.

The same calculation method can be applied to any other specified period.

The ADR indicator divides the resulting distance in half and sets each half of the current day's opening price up and down. Thus, the ADR high and ADR low are obtained, which can act as intraday support and resistance levels:

In addition to simple ADR calculation, some versions of the indicator can also calculate weekly levels, which can be useful for both intraday trading and positional trading. In the following screenshot, they are marked as Extra Levels:

Why is the ADR useful?

Experts identify several main advantages of the Average Daily Range indicator:

• It automatically calculates the price movement potential for each specific day;

• All calculations are summarized in a table in the corner of the screen, and the levels of the average daily move of the Forex instrument are automatically plotted on the price chart and highlighted in different colors;

• In addition to the standard calculation of the average daily move, some versions of the indicator can calculate the weekly average move, as well as the average range for the month. The resulting levels are plotted in the chart. They can be used as support and resistance, as well as a place for a take profit for medium-term trades;

• Even a beginner who has just opened a trading terminal can install and custom the indicator;

• In conjunction with other tools based on the ADR indicator, you can create a full-fledged trading system based on past performance.

Of course, the ADR indicator also has disadvantages. The most obvious one is that in some versions of the tool, there is no way to make the average move levels build according to the daily high or low. In this case, the indicator builds these levels based on the opening price of the day. Also, in some versions, weekly levels are redrawn every day, making trading difficult.

The ADR indicator alone is not a trading system. It only displays information calculated based on price data. ADR is more of an assistant than a guide to entering trades. To open using this indicator, you often have to employ additional tools, for example, Price Action.

ADR settings and exterior

The Average Daily Range indicator has a small list of settings related to the current period, its display on the chart, and the visual component. Let's look at each setting individually.

The ADR indicator with default settings in the MetaTrader4 terminal:

• «‎Information» — information window with data;

• «‎Weekly Levels» — weekly levels that are used as support and resistance levels;

• «‎ADR Levels» — ADR high and low calculated for the current day.

Trading signals of the ADR indicator

Initially, it was assumed that the ADR indicator should serve to search the levels to set a take profit and a stop loss rather than to generate trading signals. However, after a long observation of the price behavior at the levels of the ADR range, traders have learned to use the instrument to receive trading signals, which are based on simple logic. The price trades most of the time within its average daily move. If it goes beyond that, the next target of the movement will be the weekly level. When the weekly level is broken, the next level will be the new target, and so on.

ADR High and Low Levels

High and Low ADR levels are excellent for setting a take profit and can be turning points. As it has been written, the price is trading in the ADR range most of the time. Accordingly, after reaching the high or low level of the daily move, transactions can be considered in the opposite direction. You set a sell order at the High ADR level and a buy order at the Low ADR. The target will be either the nearest weekly level or the opposite ADR level; for a buy trade - High ADR, and for a sell trade - Low ADR.

The trader should remember that these levels are repainted every day. Therefore, if the positions entered at the ADR level are not closed automatically before the end of the trading day, they should be closed manually. The trader should spot a new trading signal on the next day.

Weekly Low and Weekly High Levels

Weekly levels, which are displayed by some versions of the indicator, are also an excellent place to set take profits on medium-term trades. These levels act as dynamic support and resistance levels. Because they are calculated on a weekly basis, they are more powerful than daily ADR levels.

You can enter buy trades at the weekly Low levels as well as at the usual support levels. The target, in this case, will be the opposite nearest level. If the High ADR level is closer to the current price of any weekly level, it is better to take profits there.

One could enter sell trades at the weekly High levels as well as at the usual resistance levels. The target will be the opposite nearest level. If the Low ADR level is closer to the current price of a weekly level, then it is better to take profit on it.

Note how exactly weekly ADR levels worked out in trading the EURUSD pair.

On May 9, 2023, the Week Mid Low level was broken, and then the price tested this level from the bottom up and formed a sell signal. This sell position was closed on May 10 after making a new low on May 9. Then the price broke out the Week Mid Low level upside, but did not give a buy signal to the Week Mid High level.

A sharp downward impulse broke out the Week Low level on May 11, and later, at the level retest, a sell signal was formed. On May 12, the price again tested the Week Low from the bottom up, and a sell signal formed again, this time with a target at the May 11 low. The target was successfully reached. On May 12, after breaking out the Week Extra Low 1 level, the price forms a sell signal, and the potential trade is exited at the Week Extra Low 2 level.

Look how levels work for GBPUSD below.

Differently put, you can trade with the ADR indicator levels as with regular support and resistance levels. A breakout of one level and a subsequent rollback to it gives an entry point, depending on the direction of the breakout. Trade targets are the next closest levels. As a filter for signals, simple Price Action patterns are used, which work well together with the ADR indicator.

ADR indicator for MT4 and MT5

Unfortunately, the MetaTrader4 and MetaTrader5 platforms do not have a built-in Average Daily Range indicator. Various versions can be found on the Internet:

• Weekly ADR for MT4;

• Simple ADR for MT4;

• Simple ADR for MT5.

The installation process is the same for any version of MetaTrader:

1. After installing and saving the indicator, open MetaTrader.

2. Click on the "‎File" → "‎Open Data Folder" in the terminal.

3. In the window that opens, find the “‎MQL4” folder (for MT5 — “‎MQL5”), then go to the “‎Indicators” folder (for MT5 additionally “‎Indicators” → “‎Examples”) and paste the downloaded indicator file here.

4. Restart the terminal.

5. Press CTRL+N and find the Average Daily Range indicator in the list "‎Indicators" (for MT5 "‎Indicators" → "‎Examples").

6. Drag the indicator with the left mouse button to the chart of the Forex instrument.

How to use the ADR in trading

The ADR indicators are used in the same way in any timeframe or trading instrument:

• As soon as the price touches the ADR level, close the position and monitor the market. The level can be broken, and then the price will continue to move. Otherwise, a counter-trend signal will appear, and you can trade in the correction;

• Medium-term transactions are closed at weekly levels (not supported by all indicators). If the price breaks through the “‎Wk Mid Lo” level, then the next target is the “‎Wk Lo” level. If the price breaks through the “‎Wk Mid Hi” level, then the next target is the “‎Wk Hi” level. Other weekly levels work similarly;

• If volatility increases, the ADR value increases;

• If volatility falls, the ADR value decreases;

• An increase in volatility may suggest that the price will go beyond the sideways trend. On the contrary, a decrease signals that the price might soon be trading flat;

• The closer the price is to the ADR level, the less potential profit we can make. Therefore, it is not recommended to enter trades near the indicator levels.

Note that you should not enter trades an hour before and an hour after the release of important news, as, in this case, volatility increases greatly, and ADR levels are not accurate. You should use other strategies to trade on the news.

Using the ADR indicator in trading strategies

Currently, traders do not actively use the ADR indicator in trading systems, but it has proven to be efficient. The laws of statistics work regardless of the market or trading instrument.

The average daily range ADR is perfectly suitable for intraday trading. Its main purpose is to fix a trading position at one of the indicator levels: at the maximum or minimum of the daily price move.

As strategies aimed at opening positions based on the indicator, you can use weekly levels as support and resistance levels. Expect a test of some weekly level, then watch the price for a while. If a Price Action signal is generated to trade from this level, you should open a buy or sell, depending on the level. Take profit is set at the nearest opposite level.

Another way to use the indicator in your trading strategies is to trade on a breakout of the previous day's low or high. In this case, the profit is placed on the ADR value. For successful trading in this way, it is necessary to determine the general trend and open positions in the trend direction.

In the example above, the first trade is entered at a breakout and exited at the ADR level. In the second trade, the price failed to reach the ADR value by the end of the trading day. Trading in the ADR range implies opening and closing positions within one trading day. Therefore, the second trade should be exited manually to take the profit.

In the case when transactions are not opened due to low volatility, orders are deleted at the end of the day and placed the next day, taking into account the updated levels.

Thus, you can define the levels to enter trades and take profits using the average daily move. Having made a series of observations and found certain patterns, a trader can use the average daily range to create an effective trading system, which will be based on the laws of statistics and probability.

ADR and RenkoSwing trading strategy

The RenkoSwing strategy is a scalping strategy based on several standard MetaTrader terminal indicators. It includes the ATR indicator, which is a variation of the ADR range but presented in a slightly different form.

There is nothing wrong with the fact that the strategy is based on simple and standard indicators. All modern complex indicators are based on classic tools such as moving averages, MACD, Stochastic, and others.

The advantage of the strategy is the use of non-standard Renko charts. The Renko chart doesn’t consider market noise; it presents the price movement in a more understandable way.

The strategy uses the following filters:

• SMA indicator with a period of 50. It defines the overall trend, suggesting the possibilities to buy or sell.

• The EMA indicators with a period of 5 and the SMA with a period of 8. When these two indicators cross, signals to enter and exit trades appear.

• The Stochastic indicator with the settings of 14,3,3 (or 15,4,4 / 15,5,5) is use to filter out false signals.

• The ATR indicator with a period of 60 is a volatility filter and helps to spot trades in the efficient market.

Strategy features

Install the Expert Advisor and Template for the Renko Swing Strategy on the MT4 Terminal:

• download the archive with files for the strategy and unpack;

• past the "‎MQL4" and "‎Templates" folders to the folder with the trading terminal files;

• restart the terminal;

• open a clean chart of the instrument you want to trade;

• switch to M1 timeframe;

• add the Expert Advisor "‎RenkoLiveCharts" to the chart;

• in the terminal, click on the menu "‎File" → "‎Open Offline";

• a symbol with M2 timeframe should appear in the list of offline quotes. For example, if you have opened a EURUSD chart and added an Expert Advisor, it will create the line "‎EURUSD, M2" in the list of offline quotes;

• open an offline chart of the M2 timeframe;

• right-click on the chart, select "‎Template" → "‎RenkoSwing".

Buy signal, according to the strategy:

• the price is trading above the MA (50) red line;

• the purple line MA (5) crosses the green line MA(8) from bottom to top;

• the ATR indicator is not located near local highs and lows but is closer to the middle of the range;

• both Stochastic lines are exiting the oversold zone.

Sell signal, according to the strategy:

• the price is trading below the MA(50) red line;

• the MA (5) purple line crosses the MA(8) green line from top to bottom;

• the ATR indicator is not located near local highs and lows but is closer to the middle of the range;

• both Stochastic lines are exiting the overbought zone.

A Take Profit is set at the local high or low depending on the trade direction. A stop loss should be twice less than the take profit.

Why the ATR indicator is used in the strategy?

The higher the ATR value, the more likely it is that volatility will fall because it is cyclical. Periods of high volatility are followed by periods of low, and vice versa, all the time. Accordingly, the lower the ATR value, the more likely it is that volatility will increase in the near future.

Trading the market at the time of changing periods of volatility is dangerous for two reasons. Firstly, there is a possibility that a sideways trend will begin, and then the trend signals will lose their relevance. Secondly, there is a possibility of a sharp volatility rise, for example, on the release of important news. In this case, the position can be closed by StopLoss. Why take substantial risk?

The Renko Swing strategy is scalping, so it is very important that the market conditions are “normal,” that is, avoiding critical deviations. Ideally, to enter a trade according to the strategy, you should wait until the ATR indicator is exactly in the middle of its chart. This means that the conditions are normal at the moment, and the trading signal is likely to work out.

As for the drawbacks of the strategy, the ATR indicator is not limited to fixed high and low values. In this regard, it can be difficult for a novice trader to determine the "golden mean" of the indicator. However, understanding will come by itself after a few weeks of training.

Many traders like the Renko + ADR strategy because it can be modified to your needs and adjusted to each specific instrument. For example, a trader can add any indicators they want as additional filters. You can also choose more accurate ATR values for each Forex instrument. Furthermore, you can optimize the Stochastic and Moving Average settings but first try trading Renko Swing with the recommended parameters on popular currency pairs.

ADR indicator and Price Action strategy

This is another simple but efficient strategy based on trading at the ADR indicator weekly levels when a Price Action pattern appears.

The main indicator is the Average Daily Range, which draws weekly levels (on the MT4 platform). To determine the signal to open a position, simple Price Action patterns are used: Pinbar, Railway Track, PPR, Bullish Outside Vertical Bar and Bearish Outside Vertical Bar, Bullish Engulfing Pattern, and Bearish Engulfing Pattern.

Features of the strategy

Buy signal:

• the price is testing the level from top to bottom;

• the level is not broken out;

• a Price Action appears.

Another example:

The second screenshot shows an interesting situation. The first signal to open a buy position was formed by the PPR pattern. However, after some time, the price makes a false breakout of the level, and the positions are closed by stop loss. After that, another Price Action pattern, Pinbar, is formed. Since the closing price of the bar is quite high and also close to the take profit level, it would be wise to open a buy trade after the price corrects by 50% from the low to the high of the pin bar. As we can see, the trend continued, and the position was closed by the take profit.

A sell signal:

• the price is testing the level from bottom to top;

• the level is not broken out;

• a Price Action appears.

One more example:

A stop loss is set beyond the high or low of the Price Action pattern, depending on the trade direction. A take profit is set at the opposite ADR weekly level.

If the price does not reach the target take profit value at the end of the trading day, the position is closed manually. Starting from the next trading day, one should search for new signals according to the indicator weekly levels of the indicator.

A trading strategy based on the use of weekly levels of the ADR indicator and Price Action signals is simple and effective. When trading with this strategy, it is recommended to follow the trend, which can be determined using trend indicators. The strategy can also be used to trade in a correction. The main thing in this case is to reduce the lot size, thereby reducing trading risks and high risk warning.

Trading strategies based on the ADR indicator are not investment advice. Use the ADR indicator only after understanding its mechanism. Keep in mind that past performance does not guarantee positive future results.

Comparing ATR, ADR, and IR (AIR)

The Average True Range (ATR), Average Daily Range (ADR), and Intraday Range (IR) are a group of indicators that show the average volatility of an instrument. Although they are all designed to determine the average, the indicators use different formulas. Each formula is needed to perform a specific task.

The ATR indicator is used to find the average volatility to show how the asset is moving at the moment, whether its volatility is increasing or not. Moreover, the definition of volatility can occur in any timeframe. If we apply this indicator on a weekly chart, we will see how the asset's volatility changes from week to week. If you apply this indicator on an hourly timeframe, hourly candlesticks will be analyzed. With each hour, the average volatility of the instrument may decrease or, conversely, increase. The ATR is represented as a curved line at the bottom of the price chart. Using the indicator, you can predict the moments of acceleration and deceleration of the price movement.

Traders use the ADR indicator when they need to determine the average daily move. This indicator is more suitable for determining exit points, as well as for determining the potential of a transaction and how much more the price can go today before the financial market slows down. The ADR value is mainly used by intraday traders. The indicator shows levels (high and low) on the price chart, which are determined statistically. They indicate that the instrument is about 80% likely to trade within these levels.

The IR indicator (AIR) measures the difference between the high and low of each price bar, usually expressed as a percentage of the opening price. Thus, looking at the indicator readings, a trader can find price bars that go beyond the “normal” movement of an asset. This is useful for those who are looking for non-standard situations and deviations from the norm. Also, using this indicator, you can identify potentially more volatile instruments today and assets with low volatility and then choose those that are best suited for your trading strategy.

It can be concluded that the ATR indicator is more suitable for swing traders who hold a trading position for several trading days because this indicator takes into account gaps.

For intraday traders, the gap calculation is not needed. ADR and IR indicators are more suitable for them. Unlike the ADR indicator, the IR indicator gives a description of each bar, which may contain additional information for analysis.

Each of the presented indicators is selected to solve specific problems and for a specific trading system. Despite some differences, all indicators serve the same purpose - to characterize the instrument's volatility and, if necessary, display the average value over a given period.

Summary

The ADR indicator is useful for intraday trading market analysis. The indicator shows how many more pips the price can move today before the trend stops or reverses. Calculations are made on the basis of past performance.

If a trader, for example, holds an open position, and the chart approaches the ADR level, it will be profitable to close the trading position near this level because the price is traded within the ADR levels for about 80% of the time. A trader who ignores ADR readings often loses profits, as he/she is forced to close the position after the market has passed its average move for the day and reversed in the opposite direction.

There are situations when the price goes through several average daily ranges, but such situations are rare, about 20% of the time in the financial markets. Why tempt fate and count on luck if you can consistently take profits at ADR levels?

However, trading strategies based on the ADR indicator are so diverse that there are techniques specifically focused on finding situations when the chart will go beyond the ADR and develop a very strong momentum. Such strategies are looking for that 20 percent probability that we talked about above.

The development of the series of ATR indicators has led to the emergence of alternative indicators that can display weekly levels. These levels represent strong support and resistance areas that can be traded.

Indicators such as ATR, ADR, and IR allow you to use the statistical advantage in medium-term and swing trading, as well as intraday trading. Each of them serves a specific purpose and is selected by the trader depending on the trading system.

By learning how to read trading signals sent by the average daily range ADR indicator and its modifications, a trader can increase his profit at a distance, as well as avoid entering the market when the active price movement may soon end.

Use the ADR indicator in conjunction with your primary trading system, follow risk management rules, find patterns, and the path to success is guaranteed to you.

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