The Average Daily Range (ADR) is a useful metric in forex trading that can help traders understand the daily volatility of a particular currency pair. By calculating the ADR, traders can better plan their trades, set appropriate stop-losses, and determine potential profit targets. In this article, we will explain how to calculate ADR in forex trading.
What is ADR?
The Average Daily Range (ADR) is the average number of pips that a currency pair moves in a day. Pips are the smallest unit of measurement in forex trading, and they represent the fourth decimal place in most currency pairs. For example, if the EUR/USD moves from 1.1000 to 1.1050, it has moved 50 pips.
Calculating ADR
To calculate the ADR, you need to take the average of the daily range over a certain period. The daily range is calculated by subtracting the low of the day from the high of the day. For example, if the EUR/USD had a low of 1.0980 and a high of 1.1050, the daily range would be 70 pips.
To calculate the ADR, you would then take the sum of the daily range over a certain period and divide it by the number of days in that period. For example, if you wanted to calculate the ADR over the past 20 days, you would add up the daily ranges for each of those days and divide it by 20.
Here is an example:
Day 1: Low 1.1000, High 1.1100, Daily Range 100 pips
Day 2: Low 1.1050, High 1.1150, Daily Range 100 pips
Day 3: Low 1.0980, High 1.1050, Daily Range 70 pips
Day 4: Low 1.1020, High 1.1120, Daily Range 100 pips
Day 5: Low 1.1080, High 1.1180, Daily Range 100 pips
To calculate the ADR over these five days, you would add up the daily ranges (100 + 100 + 70 + 100 + 100) and divide it by 5. The ADR for these five days would be 94 pips.
Why is ADR important?
Knowing the ADR of a currency pair can help traders in several ways. Firstly, it can help them determine the appropriate stop-loss and take-profit levels for their trades. For example, if the ADR of a currency pair is 50 pips, a trader might set their stop-loss at 25 pips to give the trade some breathing room, and their take-profit at 50 pips to capture the average daily movement.
Secondly, knowing the ADR can help traders identify when a currency pair is experiencing abnormal volatility. If the ADR suddenly spikes, it could indicate that there is significant market news or events that are affecting the currency pair. This information can help traders make more informed decisions about their trades.
Finally, the ADR can help traders identify potential trading opportunities. If a currency pair has a high ADR, it may be more suitable for day trading or scalping, while a currency pair with a lower ADR may be more suitable for swing trading.
Conclusion
Calculating the ADR is a useful tool for traders looking to better understand the daily volatility of a currency pair. By calculating the ADR, traders can set appropriate stop-losses, determine potential profit targets, and identify potential trading opportunities. While the ADR should not be used as the sole indicator for making trading decisions, it can be a valuable addition to a trader’s toolkit.
