The best Average Daily Range indicator
The average daily range indicator is a custom indicator designed for the MT4 trading platform. As the name suggests, the average daily range displays the average range of the security over a period of time.
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The ADR is useful for traders who use indicators such as Bollinger bands or momentum oscillators such as the Stochastics oscillator or the relative strength index. It is helpful in understanding when the momentum is rising and falling.
The ADR indicator for the MT4 trading platform is not visual in nature. It basically plots the values on the chart. Traders then have to look at the current price action to understand how the current prices are moving in relation to the previous volatility.
The ADR also helps to understand volatility. Volatility is good for intraday traders.
The large spikes in prices can give potential trading opportunities for the trader. In this aspect, when volatility is rising, traders can use the ADR to view this information.
However, the ADR indicator is based off the price, meaning that you can only look in hindsight to understand the evolving price action and the volatility that comes with it. The indicator does not predict volatility.
As a result, there are some drawbacks in the way the ADR can be used. Traders have of course designed various trading systems that use the inputs from the ADR indicator for MT4. In this article we take a look at what is the average daily range indicator and how you can use this indicator on your MT4 trading platform.
What is the average daily range (ADR)?
The average daily range is the average of the daily range of the security. This indicator has been specifically developed for the forex markets. As the name indicates, the average daily range indicator shows the average daily range of the prices over a period of time.
The ADR is a good way to understand and view the volatility of the security being analyzed. Based on the average daily range of the security, you would be able to see the current range of the security that you are analyzing and be able to tell if the markets are posting a range higher or lower than the average daily range.
Typically, when the ADR is moving above its average daily price range, it indicates that there is rising market volatility. Likewise, an ADR reading below the average daily price range could indicate falling market volatility.
The ADR can be a useful tool in determining intraday trading reversals.
The ADR’s value is calculated based on the average daily range of the past periods.
This means that if you set the lookback period to too high a value, the average daily range could be a lot more lagging.
However, setting the ADR lookback period to a small period would make it more volatile. To understand the average daily range, let’s look at it with an example.
If you notice that the price action for the past 5 daily sessions was flat, this can be represented with the average daily range indicator showing smaller values. However, if you see that the volatility spiked, based on a strong bullish or bearish candlestick, you can expect that the previous range was broken.
The ADR can be useful in this way, but the ADR indicator only plots the average daily range as a numerical comment on the MT4 trading charts. It also plots two horizontal lines indicating the previous average daily range.
Thus, when price tends to breakout from these levels occasionally, you can expect the trend to resume.
Traders would know that momentum is a precursor to a trend. It is only when momentum rises does the trend tend to take place. Therefore, the ADR can be useful in this way to show you the previous average range.
You can then compare the previous values to the current daily range in order to ascertain what the momentum is. The ADR can be helpful if you are trading breakouts or trading the corrections in the trend.
It can also be used in the long term chart as well.
Installing the average daily range indicator on MT4
You can download the average daily range indicator for the MT4 trading platform and move it to your indicators folder. Once done, head back to your MT4 terminal and refresh the indicator list.
Once your ADR indicator is picked up, you can then drag it onto your chart.
The ADR indicator works only on the intraday time frame charts. Therefore, you can see the indicator up to the H4 chart. If you switch to the daily or weekly time frame charts, the indicator does not work.
That is because the ADR indicator is based upon the daily range, therefore the indicator doesn’t work on the daily or higher time frames.
Once you drag and drop the indicator onto your charts, you will have the option to configure the settings.
ADR indicator configuration
The indicator has the following settings:
TimezoneofData: The default reading is 0 and it represents a GMT broker. You can adjust the value aby offsetting the default by the number of hours ahead or behind GMT, based on your preference.
TimezoneOfSession: You can also set the ADR to a specific time zone. The default is set to 0 and you can change this to 1, 2.
ATRPeriod: The ATR period setting is based on the average true range. The ATR default is set to 15 daily sessions. You can change this to higher or a lower reading. Bear in mind that the sensitivity of this will impact the readings of the ADR values.
LineStyle: This is a cosmetic setting and you can display how the daily range highs and lows are plotted on your chart. By changing the value, you can choose between the dashed, dotted or a continuous line.
LineThickness1: This setting allows you to configure the thickness of the line shown on your chart.
LineColor1: The line color 1 allows you to change the color of the line.
LineThickness2/LineColor2: The settings for this is the same as the previous two, except that changing these variables will mean that you will be changing the line settings for the low of the ADR.
DebugLogger: This is mostly used for developers. Setting this to true will write the log into a file which can be used for debugging. This can also be useful if you want to build an expert advisor based off the average daily range indicator.
Once the indicator has been configured and installed on your chart, you should see something like this.
Average Daily Range Indicator
The indicator plots the vertical line which shows you the average daily range for the upcoming period. As and when price evolves, the ADR’s lines will continue to shift.
The horizontal lines that you see are basically the daily range’s high and low. You can expect prices to either break past the daily range’s high or the low or price could continue to evolve within these preset levels.
An easy way to configure the vertical lines is by pressing Ctrl + Y on your MT4 chart to display the day’s opening session. Depending on the day’s start as shown by your broker and the BestADR indicator, you can then offset the Timezone configuration in your BestADR indicator to adjust it accordingly.
This is a very good way to offset the timing if you are not trading with a GMT based broker.
It should be mentioned that the horizontal lines displayed showed the higher and the low of the previous day’s as configured in the settings panel. It is not to be mistaken for the difference between the high and the low of the past periods that you have selected.
Trading with the average daily range indicator
Due to the fact that the BestADR indicator for MT4 is a custom indicator, the trading strategies are also highly customized. Many traders use the ADR as a way to trade the break outs, coupled with volatility.
When price breaks the ADR’s high or low, traders can be initiated in the direction of the breakout. This is nothing different compared to how you would trade a regular breakout when prices settle into a range.
The benefit of trading the ADR breakouts is that the breakout is often based on momentum which comes first before trends are established. Therefore, you can use this strategy and capitalize on the momentum led price action movements on the chart.
The stops and target levels are also based on the same pattern of trading regular breakouts. You can set a risk and reward ratio of 1:2 and trade based off this with the stops placed at the recent high prior to the breakout.
You can also combine other indicators such as the Bollinger bands which can also show the rising and falling volatility based on the bands’ contraction and expansion. And of course, using momentum indicators such as the Stochastics can also be beneficial to this type of trading.
Some traders take a different approach to trading with the ADR indicator.
They use the ADR’s highs and lows as a way to trade reversal. Thus, when price rallies to the ADR high but then starts to retreat, you can take short positions or when prices behave the opposite way, near the lows, you can take long positions.
Once again, trading purely based off the ADR indicator is not advisable. You will need to validate the trading signals based off validation from other technical indicators as well.
The ADR based trading is not a long term trading strategy. It is mostly suited for the short term, intraday traders or scalpers. You can also use this indicator alongside the daily pivot levels to look for confluence among these levels and trade based off it.
The average daily range indicator – Conclusion
The average daily range indicator as mentioned in this article is a simple and a customized trading indicator. It is not supplied as a default trading indicator. The ADR can be seen as an indicator that belongs to the average range family.
A most commonly used indicator is the average true range. Therefore, it is not surprising to note that the ATR is one of the settings that is included in the configuration of the average daily range indicator.
The ADR is a bit different because it plots the highs and the lows on the chart. This makes it unique. Because even if you use the ATR for example, you can only see the rising and falling range in price as an indicator plotted on the sub-chart.
By plotting the levels on the chart, the ADR allows traders some visual points to understand what is happening in the markets. Due to the fact that this is an indicator that plots values based on the past volatility, it cannot predict price movements.
Therefore, there is a good chance for price to breakout from the ADR’s high or low, or simply reverse as well. This is why traders should make use of additional validation from other technical indicators as well.
When the ADR is used in isolation, it does not provide much information. There are a number of trading strategies based off the bestADR indicator for the MT4 trading which you can look for and customize to your needs.
Traders might be wondering if they should be using the average daily range indicator. The answer to this is that if you already have a solid trading system in place, you don’t have to. But if you are looking to build a new trading strategy and one that focuses on the short term price action then the average daily range indicator can be a good indicator to begin with, to incorporate into your trading system.
The average daily range indicator can be downloaded for free and applied onto your MT4 charts. It takes a bit of practice in order to use the indicator but once you become familiar, you can start to see your trading systems using this indicator taking shape.