Using the Average Daily Range
Hello, traders. Welcome to the Pro-Trading course and the fourth module, “Day Trades and Short-Term Trades.” In this lesson, we are going to learn how to use the average daily range as a tool to filter out the bad entries.
Now, first of all we are going to learn what a daily average range is. When you are day trading or short-term trading, it’s important to always pay attention to the average daily range. The average daily range will give you the actual range on which that instrument is trading on a daily basis. Okay? It’s that simple. And some of you might not understand why this is important, but let me tell you. This is going to increase your win rate by a big percentage, just by filtering out entries that are not logical at all. This means that if the average daily range is 100 pips and the instrument has moved 80 pips to the upside today, it won’t be a good idea to go long, given that we only have 20 pips left on the average daily range. And this is the magic of the ADR.
It will tell you if your trade idea is reasonable, given the amount of pips that that instrument has already move today. This doesn’t mean that an instrument can’t go beyond its daily range. It actually happens a lot, okay? The average daily range is not an exact instrument, so for example, if you have an ADR of 128 pips, the instrument might go 140 or it might go only 100 or 99 pips. But we use the ADR as a filter for our day trades.
For example, let’s say that price is closing down on a zone where we want to buy. The ADR is 120 pips, but the daily high is at 140 pips. This means that the instrument has already moved 140 pips to the downside. This would mean that price has gone beyond the daily range for that session, and that it’s more likely to bounce off our buy zone than breaking through it and hitting our stops. So in this case, by looking at the ADR and the actual range of the instrument that trading day, we can have an extra confirmation of our trade idea of our entry. Because the instrument has gone beyond its daily range, it’s more likely for it to bounce off our buy zone and go in our favor than to break through it and hit our stops.
Now, let’s go back to the US dollar/Canadian dollar chart that we have been working on so hard on this module. What we have here on the top left of the chart is the ADR, and you can see that the average daily range for the US dollar/Canadian dollar is 129.4 pips. And what we are going to do is, I’m going to add the daily highs on the chart. And by adding the daily highs, I’m going to be able to calculate the total pips that the instrument or that the US dollar/Canadian dollar has moved today.
Now, this line right here, this black dashed dotted line is the daily high. If I hover my mouse over it, you can see that this is the current daily high. Now, I’m going to grab my Crosshair tool and I’m going to calculate the move from the daily high to this low. We choose the daily low. And I’m going to see if the US dollar/Canadian dollar has gone above the average daily range. And as you can see, the US dollar/Canadian dollar has moved 154 pips from its daily high to its daily low. Which means that it’s more likely that the US dollar/Canadian dollar will bounce off of my buy zone that I have already analyzed and hit my target, all right?
Now, this is how we’re going to use it. It’s as simple as that. We are going to look at the ADR, we are going to look at the actual range, and we are going to see if it’s more plausible that price will bounce from my zones than break through them.