What is the Average Daily Range (ADR)?
The Average Daily Range (ADR Percentage) is a key metric in trading that measures the average price movement of a financial instrument, such as a stock or a currency pair, over a specific period—typically 20 days. Simply put, ADR gives you the average distance between the high and low prices each day. This metric is incredibly useful because it provides traders with a snapshot of how much an asset is likely to move within a single trading day, allowing them to anticipate potential price swings and adjust their strategies accordingly.
In stock and Forex trading, understanding the ADR can make a significant difference. It helps traders gauge market volatility, which is crucial for setting realistic stop-loss and take-profit levels. For example, if a stock typically moves 2% a day, setting a 1% stop-loss may be too tight and could result in premature exits. On the other hand, a stop-loss that’s too wide may expose you to unnecessary risk. Thus, knowing the ADR allows traders to tailor their strategies to the actual market conditions rather than relying on guesswork.
Why is ADR Percentage Important for Traders?
So, why should you, as a trader, pay close attention to the Average Daily Range? The answer is simple: it equips you with valuable insights into market behaviour. By understanding the typical price range of an asset, you can better manage your risk and optimize your entry and exit points. For instance, if you know that a particular stock or currency pair has an ADR of 100 pips, you can plan your trades around this expected movement, avoiding over-ambitious targets that the market is unlikely to reach.
Moreover, ADR is a critical tool for volatility measurement. It tells you whether the market is in a period of low volatility (tight ranges) or high volatility (wide ranges). This information is essential for deciding the type of trading strategy to employ. During high volatility periods, you might prefer breakout strategies, while in low volatility, mean reversion strategies could be more effective.
In essence, ADR serves as a compass in the often tumultuous seas of the financial markets. It helps you stay informed, prepared, and, most importantly, positioned for success in both the stock and Forex markets.
The Average Daily Range Formula Explained
The Average Daily Range (ADR) is a key metric that traders use to measure the average price movement of a financial instrument, such as a stock or currency pair, over a set period—typically 20 days. Understanding how to calculate ADR can give you a significant edge by helping you gauge market volatility and better plan your trades. Here’s the formula for calculating ADR in percentage terms over the past 20 sessions:
ADR (%) = 100 * (((H0/L0 + H1/L1 + H2/L2 + … + H19/L19) / 20) – 1)
Breaking Down the ADR Percentage Formula
To fully understand how the ADR works, let’s break down each component:
- Hn: The highest price of the asset on the nth day.
- Ln: The lowest price of the asset on the nth day.
- Hn / Ln: This ratio calculates the range for each day.
- The Sum of Ratios: Adding up all the daily ranges over 20 days provides the total range for those days.
- Divide by 20: This gives the average daily range.
- Subtract 1 and multiply by 100: Converts the average into a percentage format, giving you the ADR percentage.
By understanding each part of this formula, you can determine the average volatility of a stock, which is crucial for setting precise entry and exit points.
Example Calculation
Let’s go through a practical example to calculate ADR for a stock. Suppose we have a stock with the following high (H) and low (L) prices over 5 days:
- Day 1: H1 = 105, L1 = 100
- Day 2: H2 = 110, L2 = 103
- Day 3: H3 = 115, L3 = 108
- Day 4: H4 = 112, L4 = 107
- Day 5: H5 = 118, L5 = 114
Calculate the daily range for each day:
- Day 1 Range:
105 / 100 = 1.05 - Day 2 Range:
110 / 103 ≈ 1.068 - Day 3 Range:
115 / 108 ≈ 1.065 - Day 4 Range:
112 / 107 ≈ 1.047 - Day 5 Range:
118 / 114 ≈ 1.035
Find the average:
Average Range = (1.05 + 1.068 + 1.065 + 1.047 + 1.035) / 5 ≈ 1.053
Calculate the ADR percentage:
ADR (%) = 100 * (1.053 – 1) = 5.3%
This ADR indicates that, on average, this stock moves 5.3% from its high to low each day. Traders can use this data to better anticipate daily price movements and refine their trading strategies.
Practical Applications of Average Daily Range in Trading
The Average Daily Range (ADR) is a versatile tool that traders can use to refine their strategies, especially when it comes to setting stop-losses and profit targets. By understanding how much a stock or currency pair typically moves within a day, you can better gauge where to place your stops and limits. For instance, if a stock has an ADR of 2%, placing a stop-loss beyond this range can help avoid getting stopped out by normal market noise. Similarly, setting profit targets within the ADR can increase the chances of hitting your targets while the trend is still active.
ADR in Forex Trading vs. Stock Trading
While ADR is beneficial in both Forex and stock trading, its application can vary between these markets. In Forex trading, ADR is particularly useful for day traders who want to capitalize on short-term price movements. Knowing the typical range of a currency pair can help you plan trades more effectively, especially in a highly liquid market where quick moves are common. On the other hand, in stock trading, ADR can be a valuable tool for swing traders who hold positions for several days. By understanding the average range, stock traders can better anticipate potential price fluctuations and adjust their strategies accordingly.
Integrating Average Daily Range with Other Indicators
To maximize the effectiveness of ADR, consider combining it with other technical indicators such as moving averages, Relative Strength Index (RSI), or Bollinger Bands. For example, you could use ADR to set initial stop-loss levels and then adjust these levels based on signals from the RSI or moving averages. Additionally, Bollinger Bands can provide context about whether a stock is overbought or oversold, which, when combined with ADR, can help you make more informed trading decisions. This integrated approach allows you to align your entries and exits with both market volatility and momentum, enhancing your overall trading strategy.
What is the ADR Percentage?
The Average Daily Range Percentage (ADR%) is a measure that shows the average daily volatility of a stock or currency pair in percentage terms over a specified period, typically 20 days. This percentage tells you how much, on average, an asset’s price fluctuates daily relative to its price level. Calculating the ADR% is straightforward: divide the average daily range by the asset’s average closing price over the same period and multiply by 100. This calculation provides a clear view of the asset’s daily movement in percentage terms, allowing traders to better understand market volatility.
Benefits of Using ADR Percentage
Using ADR in percentage format is particularly beneficial when comparing the volatility of different stocks or currencies. The percentage format standardizes the movement, making it easier to compare assets of varying prices. For example, a stock priced at ₹100 and another priced at ₹1000 with the same ADR in rupees would appear equally volatile in absolute terms. However, the ADR% would reveal the true extent of volatility relative to their prices. This insight helps traders choose assets that align with their risk tolerance and trading strategies, ensuring more informed decision-making.
How to Set Up Average Daily Range in TradingView
Setting up the Average Daily Range (ADR) indicator in TradingView is a straightforward process that can help you better analyze market volatility. Follow these simple steps to add the ADR indicator to your TradingView chart:
- Open TradingView: Log into your TradingView account or create a free one if you haven’t already.
- Select Your Chart: Choose the asset (stock, Forex pair, etc.) you want to analyze.
- Access Indicators: Click on the “Indicators” button at the top of your chart.
- Search for ADR: Type “ADR” or “Average Daily Range” in the search bar.
- Choose the ADR Indicator: Select the ADR indicator from the list that appears. Some versions may be labelled “ADR%” or “Average Daily Range %.”
- Customize Settings: Once the indicator is added, you can customize the settings, such as the period length (typically set to 20) and the display style, to match your preferences.
- Apply and Analyze: Click “OK” to apply the settings. The ADR will now display on your chart, allowing you to analyze the average daily range for the selected asset.
ADR Percentage TradingView Script Explanation
If you prefer to use a custom Pine Script for more control over the indicator, here’s a simple TradingView script to calculate the ADR percentage:
//@version=4
study(title="ADR% - Average Daily Range %", overlay=false)
Length = input(20, title="length")
dhigh = security(syminfo.tickerid, 'D', high)
dlow = security(syminfo.tickerid, 'D', low)
ADR = 100 * (sma(dhigh/dlow, Length) - 1)
plot(ADR, color=color.orange, title="ADR", linewidth=1)Explanation of the Script:
- @version=4: This line specifies the version of Pine Script being used.
- study: Sets the title and type of the indicator.
- Length: Input parameter to set the number of days for ADR calculation (default is 20).
- dhigh and dlow: Fetch the daily high and low prices for the asset.
- ADR Calculation: Computes the average daily range percentage over the defined period.
- plot: Visualizes the ADR percentage on the chart.
By following these steps and utilizing the script, you can effectively monitor market volatility using the ADR indicator in TradingView, enhancing your trading strategy.
Timeless Trading Setups for Using Average Daily Range Effectively
The Average Daily Range (ADR) can be a powerful tool when integrated with proven trading setups. Quallamaggie, a renowned trader, has popularized three timeless setups: Breakouts, Episodic Pivots, and Parabolic Shorts (or Longs). These setups have stood the test of time because they focus on capturing significant price movements. By combining these setups with the ADR, traders can enhance their entry and exit strategies, optimizing their chances for success.
Applying ADR to These Setups
- Breakouts: Breakouts occur when a stock price moves beyond a defined resistance or support level. By using ADR, you can measure whether the breakout is within the typical daily range or if it exceeds it, indicating stronger momentum. This helps in confirming the validity of the breakout and deciding whether to enter a trade.
- Episodic Pivots (EP): These occur when a stock experiences a significant move, often due to news or an earnings report. Applying ADR helps in setting realistic profit targets and stop-loss levels based on the expected daily range. If the EP aligns with a high ADR, it suggests a strong move that could provide a good trading opportunity.
- Parabolic Shorts (or Longs): This setup involves trading stocks that have experienced a parabolic move and are expected to reverse. ADR can help identify the exhaustion points by comparing the current price movement with the average range, providing a better signal for when to enter a counter-trend trade.
Real-World Examples and Best Practices
Consider a stock like Rail Vikas Nigam Limited or RVNL breaking out of a key resistance level on 21st May 2024 with an ADR of 4.55%. The breakout move is 14.03%, exceeding the ADR, it could signal a strong bullish trend, confirming the breakout.
You can also see, that an earnings report caused the stock like RVNL to pivot sharply, and the move aligns with the ADR, it provides a safer entry point for trading. Check the image below to see how the RVNL stock performed after the breakout. The breakout produced 86.12% returns within the next 36 bars. The stock reached Rs 630 from Rs 341.75 on 11th July 2024.
Using ADR with these setups not only helps validate potential trades but also aids in managing risk more effectively. Always monitor ADR along with other indicators to make well-informed trading decisions.
Advanced Techniques for Using Average Daily Range
For traders looking to refine their strategies further, the Average Daily Range (ADR) offers several advanced applications. One such strategy is using ADR for “blind entries,” which involve placing buy or sell orders without waiting for a traditional price action signal. This technique is particularly effective during high-volatility events, where the market is likely to move significantly. By understanding the ADR, traders can anticipate the likely price movement range and set entry points accordingly, increasing the probability of entering a trade at an optimal level.
Another sophisticated use of ADR is during news releases or economic events that are expected to cause sharp price movements. During these times, ADR can be used to predict how far the price might swing, allowing traders to set appropriate stop-losses and profit targets. This approach not only capitalizes on volatility but also helps in managing risk more effectively.
Real-World Examples of ADR Strategies
Consider a scenario where a trader uses a blind entry technique on a highly volatile stock like Tata Motors during an earnings announcement. Knowing the stock’s ADR is 2.29%, the trader sets a buy order 1% below the pre-announcement price, on 2nd February 2024 anticipating a swing within the ADR range. The stock dropped more than 1% hitting the buy order after the announcement but quickly recovered the next day and then moved up, allowing the trader to capitalize on the reversal.
Another example is using ADR in Forex during a Non-Farm Payroll (NFP) release. If the EUR/USD pair typically moves 80 pips on such days, a trader might set orders just outside this range, expecting a breakout. This strategic use of ADR helps in capturing potential gains while safeguarding against unexpected volatility.
By incorporating these advanced techniques with ADR, traders can better navigate the market’s complexities, enhancing their trading strategies to achieve greater profitability.
Final Thoughts on Using ADR Percentage
The Average Daily Range (ADR) is a versatile and powerful tool that can greatly enhance your trading strategies. From setting precise stop-losses and profit targets to identifying potential breakout points and managing risk, ADR helps traders navigate market volatility with greater confidence. Whether you’re trading stocks, Forex, or other financial instruments, understanding and applying ADR can provide a strategic edge.
I encourage you to start incorporating ADR into your trading toolkit. By doing so, you’ll be better equipped to make informed decisions, optimize your entry and exit points, and ultimately achieve more consistent trading results. Embrace the power of ADR and take your trading to the next level!