ADR

ADR (Average Daily Range)

ADR (Average Daily Range)

The Average Daily Range (or weekly/monthly) shows the average pip range of a Forex pair (or any other asset) measured over a certain number of periods. There is no exact science behind the ADR period. The rule of thumb is anywhere from 5 to 15 periods based on how volatile is the asset.

When ADR is above average, it means that the daily volatility is higher than usual, which implies that the currency pair may be extending beyond its norm. The ADR can be helpful in setting targets for positions you are currently in as well. 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. ADR does not repaint, rather it recalculates from the opening price to the current H/L. If price covers above 50% either of the side and price shows reversal then ADR is more likely stays static.

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, ADR = (56 + 27 + 78 +30 + 42) / 5 ADR = 46.6 (approx. 47)

Reaching upper or lower ADR lines don't mean a certain reversal. Sometimes if a pair or asset has a low ADR move in the past few days then it can break the current ADR range and go beyond, two or three times more pips than its normal move. So, it's wise to look back to the past few days of the ADR movement. If the Asian session has high volatility then ADR may set in the early London session. Otherwise, on most days ADR sets within the first 3 hours in the London session depending on the volatility.

Indicator - Onsen FX Algo