Technical Trading – Forex Average Daily Range
We’ll be explaining how you can improve your profit taking process by using the average daily range of a currency pair.
The Average Daily Range or ADR for short is simply an indication of how far the price of a particular currency pair moves over the course of a 24-hour period. If you’re day trading currencies then you can actually set your profit targets based on where the average daily range extends to.
RECOMMENDED READING: AVERAGE DAILY RANGE AND OTHER TECHNICAL INDICATOR TRADING
The reason daily range is so useful is because it gives you a good indication of how far the pair you’re trading tends to move on a daily basis. Having that information can be tremendously helpful when it comes to placing trades and then managing them.
For example, if you see a great opportunity to buy a certain pair, the next question is how many pips should you aim to make and how many pips should you risk. If the pair has only been moving 30 pips per day, it’s unrealistic to try and aim for a 200-pip profit. It would also be pointless using a large 200 pip stop loss. Instead, you’d want to look for profit targets within that 30-pip range. Doing this will result in your trades reaching their targets and you banking pips on a more consistent basis.
Once you know in what kind of range to look for profit targets, you can then look for key areas of support and resistance within that range where the price is likely to react. For example, if you’re buying the pair that has an ADR of 30 pips … You might notice that there is a key level of resistance, 20 pips away from where you entered.
This combination of a key technical level within the price range that the ADR gave you, is a fantastic way to determine high probability profit targets for your intra-day trades. It’s important not to get too carried away with using the average daily range as a firm rule.
Very often the price will exceed the ADR or fail to extend its full distance. Remember, it’s only an average that you should use as a guide.
You still need to have a fundamental rationale for entering your trade and you also need to look for technical levels as reference points. However, if you do that within the average daily range of the pair you’re trading, you’re going to see much more consistent results.