Average Daily Range (ADR) is a highly useful and powerful measurement that can give you a real edge in any market that is tradeable on forex, crypto, stocks and indices. This video introduces ADR and a simple way to get an edge using it, as well as some powerful indicators that will help you get into trades at key levels to make profits.
Here is the ADR Reversal Indicator: https://www.mql5.com/en/market/product/62757
And it’s dashboard too: https://www.mql5.com/en/market/product/62756
You can download the market structure reversal indicator here: https://www.mql5.com/en/market/product/46295
Get the EA here: https://www.mql5.com/en/market/product/65383
Video Transcript
Okay, let’s talk about ADR, average daily range. So in this video, I’m going to cover what ADR is, how it’s calculated. I’m going to show you how you can get data for average daily range to do your own analysis. I’m going to cover all the analysis that I’ve done with ADR and the systems that I’ve worked out using ADR to make it a profitable indicator for me. I’m going to have a quick look at the indicators that I’ve created to help you trade with ADR and the EA as well, which you can use to do ADR trades.
And we’re going to look at some ways to trade with it. So let’s get started. So what exactly is ADR? Well, the ADR stands for the average daily range. And basically what the average daily range is, is an average movement from a high to a low taken on any instrument that you’re trading over a specific period of time. So as you can see on my chart here I’ve got my ADR reversal alert indicator and as you can see in the top left hand corner here we have the ADR10 figure. So the ADR10 is the figure that I use and I’ll go over the analysis that I’ve done shortly and just show you why I settled on ADR10 as the best figure to use. But as you can see the ADR 10 on this particular pair which is the EuroCAD is currently sitting at 93.7. So the way that this is calculated is the ADR is from the high of the day to the low of the day okay and it starts calculating at the previous day. So this is the last two weeks of movement basically that this is currently measuring. So if we put a little measure on these daily moves here. So if I take the high here and measure down you can see that the pip movement on this particular day was 99 pips.
The next day we had a range of 58. Then the following day we had a range of 133 pips roughly. And then the day after that, we had a range of 78 pips roughly, and so on. So that is basically how it’s calculated. We measure the range of the pair on every single day and then we divide that total number by our measurement in this case which is 10 days and that gives you your average. And what this is showing is that over a period of two weeks this particular instrument will only move on average around about 93 pips and this gives us an advantage or an edge in the market because we know that when price hits that extreme, the likelihood is that it’s not going to go any further. Or if it does go further, it won’t go particularly far beyond that level. And we can use this information with backtesting to find out what the chances are of price exceeding specific levels. You can see on the chart here I’ve got my ADR reversal indicator and what this is showing me is the average daily range extremes for this particular currency for this particular day and it’s showing me the percentage chances of it exceeding these particular levels and I’ll go into in a second how this data was calculated and how it’s how it’s been arrived at. So that’s basically what ADR is okay so it’s just a measurement of the average movement of any instrument over a specific period of time.
So if we pop a different pair onto the chart for example like the US dollar yen here you’ll see that that changes now to 61.6 so the average range of this particular currency pair is 61 pips. So it’s important you know this information because you need to know what the average range is so that you can plan your trades. So for example if price was to shoot up and hit roughly around this area and you had a long signal given by whatever system you’re trading it’s probably not the best time to take a new trade because the chances of it going further than this particular point are Not very high are they because it’s already done its daily movement You’re better off waiting for some kind of pullback to then jump into a trade So it’s a really useful indicator and it’s something you should be using just to measure How far price is going to be moving on a daily basis?
so we’re going to quickly have a look at now how this data has been accumulated and the research that I’ve done into Average Daily Range so we can get an understanding of the maths behind why it’s such a useful indicator and how the strategies that we use are calculated. So we’ve got on the chart here investing.com and investing.com is basically a website where there is loads and loads of information on stocks, on forex, crypto, anything you want to trade basically. There’s lots of information on here. But one particularly useful part of investing.com’s website is that it stores historical data for virtually every instrument that you could want to trade. So what you can do is you can come onto here and you can go to an individual currency pair and you can click on historical data and it will give you all the historical data for whatever time period you want which is the price the closing price open high and the low and the change for the individual day and you can do this for daily weekly and monthly so what I basically did was I went to this website and I downloaded the last 15 years worth of data for every single major currency pair, some of the minor pairs and a couple of indices like the SPX.
So that I could get an overview really if you like of what the average daily ranges were over a much longer period of time. build an analysis for the chances of price exceeding specific levels beyond its normal average daily range. So that’s where I got all my data from. You can go to this website and as you see you’ve got a download data button here. You can download all of this data yourself and if you want to go and do your own calculations that’s fine. But I’m going to show you now how I did the calculations in Excel and how I came to the I basically came up with four the best levels to give us an edge in the market. Okay, so this is one of my calculation spreadsheets and I created one of these spreadsheets for every single major currency pair and as you can see here this one is the pound US dollar and what we’ve got the date, the close, the high, and the low of each of the days for this particular currency pair.
We’re going all the way back to January 1999 here. What I did was I calculated a new column which gave me the daily range for that particular day for this currency pair, and then a new column which gives me, in this case, the ADR 10 figure. So what this is is a calculation which takes into account the previous 10 days and averages it out and then it gives us a percentage for that particular day. So the average daily range on the 18th of January was 133.5 pips, that’s the average daily range of the last 10 days and on that particular day it moved 70 pips so that gave us roughly 52 percent of its average daily range it moved. Next day the average daily range was 123.5 and it moved 142 pips so you can see there that it did 115 percent of its average daily range and from all of this data what I was trying to find was an ADR number that gave the best bounce rate from around about 100% of its average daily range and it didn’t exceed too much of its average daily range on a regular basis.
So I was looking to see if there was a way that we could use this data to take trades when price had moved beyond its average daily range and it would then pull back to give us an edge in the market. I tested lots of ADR figures starting at ADR5 and going all the way up to ADR20. So basically I was testing one week’s worth of data all the way up to roughly one month’s worth of data and the figures that I got basically told me that the ADR 10 figure was the most accurate. And the vast majority of the time, ADR 10 would over 50% of the time not exceed 125% of its average daily range. So that meant that if we were taking trades when price moved to 100 to 125% of its normal average daily range, there was a high probability that price would not move very much further than that and give us an opportunity to trade a pullback or a reversal.
So that’s how I came up with the ADR figure that I use which is the ADR10. You can see a lot of data at the top of the spreadsheet here and this is basically the percentages of price basically exceeding these ranges. Now as you can see, 57% of the time on the Pound US Dollar, price stayed within its ADR 10 figure. It exceeded that ADR 10 figure 43% of the time. 23% of the time it got over 125% of its average daily range. 12% over 150 and so on, all the way up to 300 percent. Now you can see that when price gets to 200 to 225 percent of ADR there is an absolutely tiny chance of it exceeding those levels and what you’ll find is these will be fundamental news events that will have pushed price incredibly hard like rate changes and things like that for example on the USW could class non-farm payroll as one of those events. So the majority of the time if price gets up to 200% of its ADR there is only a 3% chance of it pushing higher and what that gives us is an incredible edge in fact a 97% edge in the market. So there’s a 97% chance that when it achieves that level it’s actually going to either stay where it is or it’s going to retrace. As you can see gives us a massive, massive advantage. So I did this for every single major currency pair and lots of minor pairs and that gave me an average data range that I could use and analyze across all of these majors. So we’ll have a quick look at the under 100% figures on this column here for example for all of these pairs that we’ve got in the spreadsheet you can see that the vast majority of them are roughly the same. So we’ve got a 57.35% there, 57.44, 57.61, 58.15 and so on so it’s always roughly somewhere around about the 57 to 58 percent mark and the same when we get up to the 200 levels 3 percent 3.3 3.5 3.5 3.1 uh us.en a little bit more extreme at 4.17 but as you can see they’re all very very very similar so the data is the same across most of the major forex currency pairs.
So what I extrapolated from this was that all instruments move in roughly the same way. So we know that the market is manipulated by the big banks and by the big hedge funds, basically the people with enough money to pump into the market to make price actually move. And we know that they take price a certain distance each day and then they don’t tend to exceed that very often and this is what this data is telling us. So what I decided to do was to take an average and the average worked out across all of these is the column AB you see in the spreadsheet here and this is the data that is shown on the indicator. So we can see that most of the time 57.5% roughly price will stay under 100% of its ADR figure. When it gets to 125% of its ADR there is only a 23% chance of it exceeding that. So it gives us a big edge in the market when we see price moving over its ADR or its average daily ranges.
So we’ve come back over to the chart now and we’re going to look at how we can use this information to our advantage. So as you can see I’ve got the indicator here with the ADR reversal indicator and you can see that those levels we just looked at in the spreadsheet are marked out here on the chart. So we can see at the moment on this particular instrument New Zealand dollar CAD price has just hit 100% of its ADR figure and if we zoom down you see we’ve got an alert there to tell us that if we zoom down onto the M5 chart the way that we can use this information to our advantage is basically to monitor pairs and when they get to these levels look for reversal opportunities or pullback opportunities. Now we know that there’s a roughly 57.5% chance of price staying within its average daily range and now we’ve hit its average daily range one of two things is going to happen. Price is even now going to sit there and typically consolidate or it’s going to put in today. So our strategy with the ADR reversal indicator is to wait for price to hit these levels and then look for price action signals to show us that there’s a potential reversal starting to happen. Now the further price pushes against these levels as you can see the it going further diminish dramatically. When we get down to the 150, 175 and 200 percent levels the chances are very very high that price is going to stall at one of these levels and the vast majority of the time pull back and typically pullbacks we tend to see are around about 25 to 50 percent of the average daily range if it’s a pullback. If this is the final push before price puts in a reversal, you’ll see price push way harder in the opposite direction and those are the trades, the home runs, where you make the vast majority of your money. So the ADR reversal alert indicator is designed basically to sit on your chart and it will tell you when price exceeds specific levels. If we have a quick look at the settings on the indicator. You can see that you can select the ADR number. This is alterable but I would recommend you keep this on to 10. We’ve got an ADR high and low color for the text and the lines which are drawn on your chart and you can change whether they’re solid or whether they’re dashed and dotted and the normal normal empty for drawing tools. There’s three different types of alerts that it can send you. It’s automatically defaulted to send you pop-up alerts but it can also send you email and push notifications if you have those set up in your MT4 and you can ask it to send you alerts at specific levels.
So for example if you wanted to take very very high probability trades only you could say I don’t want to receive alerts at 100 or 125 percent I only want you to tell me when price gets to 150% or higher and that will give you alerts when price is at a very very high extreme and has only a 12% chance of pushing further giving you an 88% chance of either a consolidation or a pullback from that point. So you can change the text obviously that is alerted in the indicator as well. So that’s basically how the indicator works and how the indicator can be used to alert you to these potential reversals and pullbacks now a lot of the time obviously With this type of strategy what you’re going to be doing is trading counter trend as you can see the trend on this particular pair at the moment is down and As it’s pushed hard down to its ADR There is potential for this to just do a small pullback and then continue in its current direction so there are two types of ADR reversal trades that you can take the first one is a reversal or a counter trend trade where price is pushing hard and You are expecting it to push further and then pull back so what we would expect in this particular case is for the trend to continue and price just to pull back. And if price is going to pull back, it’s more than likely going to pull back to a level of previous support that will typically turn into resistance. So that is where you would set your target. So whenever you get some price action, reversal candles or another indicator like a moving average or the market reversal alert indicator as I have on the chart here.
Once you have the alert to go long, you would then set your TP at that level and set the stop below the most recent low if you’re going to use stops with the strategy. The other type of trade that you will get will be a continuation trade. So if price was pushing down hard in this direction and then price pulled back hard and hit its average daily range that would be a continuation trade. So with those what you’d be looking for is price to push up to its ADR level and then to push down and continue on its current trend. Obviously taking trades in line with the overall trend from ADR reversals will be more successful and they will also give you a much higher reward because the potential is for price to break through the previous support that it found and continue on its way. So there’s two types of ways that you can trade with the indicator. I would encourage you to go and try different ones out, back test, have a look, but I mean the ADR indicator works in all conditions as you can see price is pulling nicely back at the moment from this current level. Now the way that I use the ADR indicator is also combined with the market reversal alerts indicator and I tend to take my trades on either M5 or on M1. So the M5 time frame I look at first of all if I have a support rectangle drawn by the indicator what will happen is obviously when it breaks above that I will get an alert to take along.
The problem with this in this particular case is it’s quite far away so my stop would be roughly 20 pips here and my reward would be roughly 25. So not a great risk reward on this particular trade. So dropping down onto the M1 time frame you can see obviously the support rectangle is drawn a lot closer to price so we have a much tighter stop only six or seven pips in this case and our reward is way way way up there sort of whoops 40 odd pips away so a much much much higher risk reward but obviously being on the M1 time frame there is a possibility that price will Obviously give you a lot more false signals so you could be stopped out a number of times So those are the ways that I tend to use the indicator But I’m always waiting for some kind of reversal alert and the market reversal alert Indicators the obvious choice obviously because it shows you when price is pushing back in the opposite direction. But there’s lots of different indicators you could use with the strategy and alongside the ADR reversal indicator.
There is also a dashboard. This is the ADR reversal alerts dashboard and this will monitor all pairs for you automatically and it will give you alerts when ADRs are hit and as you can see it will also give you alerts when ADR percentages are exceeded as well. So this is the same as the indicator it’s monitoring the same levels but what it’s doing is it’s just monitoring all pairs for you. So you can just stick this onto one chart which is the way that I tend to use it and then basically it will alert me when things get to ADR then I can go and do my analysis and decide whether I want to take an ADR reversal and how. The other advantage of the dashboard is it also gives you average weekly range extensions and average monthly range extensions too. So as you can see here the Pound New Zealand has exceeded its average weekly range and also its average daily range.
So we can see that this is pushing very, very hard at the moment. So it’s likely to be needing to do a pullback. So there’s lots of advantages to using the dashboard. Obviously having just one chart open to monitor all pairs is the main advantage, but you also get the weekly ranges and the monthly ranges. And again, with the indicator settings here you can alter the numbers you want to use. Just to cover the weekly and the monthlies so with these I did exactly the same analysis in the spreadsheets with the data from investing.com but what I found was with the weeklies and the monthlies there’s probably some reason why there was a coincidence but it was the AWR and AMR 12 figures that work better. So these were better bounce rates at 100 and 125 percent than the average 10 week or 10 month ranges. So those are the figures I’m using but to be honest there wasn’t an awful lot of difference in the data. So you could just set everything to 10 but 12 I found was ever so slightly better which is why I use those.
So again, same principle applies with those. If you get an alert on the average weekly range, you can basically look at that pair and you can either stick the market reversal alert indicator onto the chart to alert you when price is switching direction and then take a short. Obviously the higher timeframes, like the weekly ranges and the monthly ranges, the chances of the pullbacks being much much bigger are greater so there’s a much better reward but they will take a lot longer to play out. With the average weekly and average monthly ranges you could trade those either on the M15 time frame or you could select the hourly time frame depending on how long you want to hold the trades for. But with ADR I would recommend using somewhere around M5 or if M5 is too far away for a reversal alert as in this case, switch down to M1.
And as you can see, you’ve had the reversal alert there and price has already moved four pips. So if we’d had a six pip stop on it, we’re roughly at one to one, near enough already, aren’t we? Okay, so that is how I use the ADR reversal alert indicator and the market reversal alert to do with average daily ranges and that’s the strategy that I use to give myself an edge. There is another way to trade using ADR. We also have the market reversal alerts EA and the EA you can basically put onto your chart and use to take entries automatically for you.
So if I stick this onto the chart now, you’ll see that we’ve got lots and lots of settings here. This is basically an automation system for the market reversal alerts indicator. There’s another video on YouTube and on the website if you want to find out more information about the EA and how it works. But we have a setting in here called ADR filter settings. And if you set this to true what it will do is it will take trades for you automatically when price gets to ADR levels and we get a market reversal alert. So it’s a kind of automated way of triggering the initial trade with the strategy that I have just explained.
So that’s another option for you if you wanted to. If you wanted to automate it you could use the market reversal of that CA, stick that on your charts when price gets to ADR and just let it take the trades automatically for you. Now there’s one other strategy I want to discuss with the ADR indicator and ADR levels and that is the basket trading strategy. Now this one is a little bit more risky but can give you a much much higher strike rate and in some cases an incredibly high risk reward as well. So basket trading is a way of getting into a position gradually. So what you would do is you would set an initial entry at a specific level and then if that initial entry works out for you and the trade works fine you would just basically take your profit and walk away. The basket part of the strategy means that if price moves against you and first initial entry doesn’t work, you can take additional entries at specific levels to average into your trade.
So your average price will basically move down the more positions that you take. So to demonstrate that, I’m just gonna quickly have a look at this trade that we’ve got on at the moment and we’re going to look at the different levels. So if for example we were to take our first entry at the ADR 100 level here and that level fails and price pushes down to ADR 125 we could take a second entry at ADR 125 and that means that the average price of our trade is now somewhere in between those two levels. If price then continues to push further and gets down to 150% of ADR your average price will then be at 125% of ADR because you’ve got three positions in and the average price will now be in the middle of those two.
And you can repeat that process as many times as you like at different ADR levels all the way up to 225 or even higher if you want to to average in to the position and what this means is that you don’t need much of a pullback to get your trade back to break even so there’s two uses for this the first is when you’re scaling in and you your initial entry doesn’t work, you can use averaging and basket trading to basically get yourself back to a break-even level on the trade and scratch it so that you don’t have a loss. Obviously, price can continue to push against you. So that’s the danger with doing that sort of method.
The other way to use it is to gradually scale in and then wait for price to give it a decent size of pullback or reversal and use all of those positions to basically profit from the market. Obviously you have to be careful when you’re basket trading so you can’t get in with your normal lot sizing. So if you were to risk half a percent or one percent or two percent or whatever it may be on each individual trade you would need to split that down into multiple positions. So what I tend to use is somewhere around 0.2% or 0.3% for each of my entries when I’m getting into this type of strategy. You can also spread your entries further apart so you could say I’m just going to get in at 100% of ADR and then I’m going to spread my entries wider apart so you would only have three entries and if price got down to the 200% ADR level there’s only a 3% chance of it exceeding that so therefore the chances of it pulling back are going to be extremely high and you’ll only have three positions in the market rather than five so the drawdown will be less or you could say that I just want to take my first entry at 150% of ADR, and then I’m gonna scale in at 175, 200, and 225, and have four positions, because I know that by the time we get to 225 ADR, if price gets there, there’s a very tiny chance of it exceeding there.
So the chances of a pullback are even greater. So as you can see with basket trading, there’s lots of different options that you can use, and you’d need to play around with different lot sizing and play around with different ideas with entry levels but the idea of basket trading is to get in very very small so that the risk is very very small and you can monitor the trades then and take partial profits move to break even let some run and do all sorts of things with these once you’ve done it but it’s an incredibly useful indicator for basket traders because we know the odds when we get down to these levels dramatically decrease of price moving further therefore the chances of our trades working out are much higher but we don’t know at what level price is going to stop a lot of the time so by basket trading if price moves down to say 150 and then we take that as our first entry we could say I’m going to get in again at 175 and 200 but if it gets to 225 I’m going to scratch the trade completely. So you would set each of these pending orders here and then you would set a stop loss for every order at 225. So if it pushes all the way down to there you’ll get out of your trade and obviously you’ll need to calculate the risk and the lot sizing accordingly to make sure that this is not more than what you want to risk per trade and I’d recommend no more than sort of a half a percent one percent per position that you’re getting into. Now with ADR reversals obviously in basket trading the what’s going to happen with these price levels as they get hit is Prices either going to hit them and it’s going to bounce and pull back It’s going to hit them and it’s then going to go into a reversal and push much harder or it’s going to hit them and then consolidate During usually the New York session and to the Asian session Now if we get a situation where we hit the average daily range and then price just decides to consolidate. It’s your choice whether or not you want to scratch that trade or whether you want to wait and see what happens the following day.
But with ADR reversals and pullbacks what ideally we want to see is price push hard into these levels and then bounce usually within a few hours. What we tend to find is when an ADR level gets hit normally within a session i.e. within the London session or within the New York session we will find that price will perform its pullback or its reversal. If it consolidates a lot of the time there’s a chance that it will continue to push to the downside in this case and get you into either more drawdown if you’re using a basket strategy or it will stop you out. Okay so that’s another way of trading with ADR levels if you wanted to you can use basket trading strategies. So that is the overview basically of ADR that is how I came to the system that I use with Average Daily Range that is how I developed the indicators and part of what the EA does for the Market Reversal Alerts EA. So hopefully you can see the benefits of the strategy as with any strategy it’s not perfect it will get to 225 and then it will exceed and go to 300% ADR.
We know that, we’ve seen it before. But the chances of it doing that are very rare. But you can see how this can give you an edge into the market. If you just take trades when prices are at very, very extreme levels, we know from historical data the chances of price exceeding those levels is very, very small. So use it to your advantage, use the market reversal alerts indicator to draw the levels onto your charts. Use the dashboard to alert you to opportunities across all the pairs and instruments that you want to trade and if you want to use the EA to automatically just get you into those trades and then you can manually monitor those trades as price has as the EA has got you into the positions. So I hope you enjoyed that. If you’ve got any questions feel free to come into the Telegram group, the Market Structure Trader Telegram group, and you can ask questions in there.
Or send a message via the MQL5 comments section in any of the indicators or the EAs that we have for sale on the MQL5 market.
