Forex trading can be a lucrative venture if the right strategies are employed. It involves buying and selling currencies in pairs, with a goal of making a profit from the fluctuations in the exchange rates. One of the key factors to consider when trading forex is the average daily range (ADR) of the currency pair. The ADR helps traders to determine the potential profit or loss that they can make on a given day. In this article, we will explain how to find the ADR in forex.
What is the average daily range?
The average daily range (ADR) is the average distance between the high and low prices of a currency pair during a trading day. It represents the volatility of the currency pair and is measured in pips. The ADR can help traders to determine the potential profit or loss that they can make on a given day.
How to find the ADR in forex
There are several ways to find the ADR in forex. One of the easiest methods is to use an ADR indicator. Most trading platforms have an ADR indicator that calculates the ADR for you. Alternatively, you can calculate the ADR manually using the following steps:
Step 1: Determine the time frame
The first step is to determine the time frame that you want to calculate the ADR for. Most traders use the daily time frame, which means that the ADR is calculated based on the high and low prices of the currency pair during a 24-hour period.
Step 2: Calculate the daily range
The next step is to calculate the daily range of the currency pair. The daily range is simply the difference between the high and low prices of the currency pair for the day. For example, if the high price of the EUR/USD pair for the day is 1.1200 and the low price is 1.1100, the daily range is 100 pips.
Step 3: Calculate the ADR
The final step is to calculate the ADR by averaging the daily ranges over a certain period of time. Most traders use a 14-day period, which means that the ADR is calculated by adding up the daily ranges for the past 14 days and dividing the sum by 14. For example, if the daily ranges for the past 14 days are as follows:
Day 1: 100 pips
Day 2: 120 pips
Day 3: 80 pips
Day 4: 90 pips
Day 5: 110 pips
Day 6: 70 pips
Day 7: 130 pips
Day 8: 100 pips
Day 9: 90 pips
Day 10: 120 pips
Day 11: 80 pips
Day 12: 100 pips
Day 13: 110 pips
Day 14: 90 pips
The ADR for the EUR/USD pair over the past 14 days would be calculated as follows:
(100 + 120 + 80 + 90 + 110 + 70 + 130 + 100 + 90 + 120 + 80 + 100 + 110 + 90) / 14 = 97.86 pips
This means that the average daily range for the EUR/USD pair over the past 14 days is 97.86 pips.
Why is the ADR important in forex trading?
The ADR is important in forex trading because it helps traders to determine the potential profit or loss that they can make on a given day. If the ADR is high, it means that the currency pair is volatile and there is a higher potential for profit or loss. If the ADR is low, it means that the currency pair is less volatile and there is a lower potential for profit or loss.
Traders can use the ADR to set their stop-loss and take-profit levels. For example, if the ADR for the EUR/USD pair is 100 pips and a trader wants to set a stop-loss of 50 pips, they can place their stop-loss at a level that is 50 pips away from their entry price. Similarly, if they want to set a take-profit level of 150 pips, they can place their take-profit level at a level that is 150 pips away from their entry price.
Conclusion
The average daily range (ADR) is an important factor to consider when trading forex. Traders can use the ADR to determine the potential profit or loss that they can make on a given day and to set their stop-loss and take-profit levels. The ADR can be calculated manually or using an ADR indicator on a trading platform. By understanding the ADR, traders can make more informed trading decisions and improve their chances of success in the forex market.
