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Daily Profit Loss Indicator – In today’s lesson, we will discuss a very simple yet very useful tool that can provide valuable information to the trader. The indicator I am referring to is called Average Daily Range (ADR), which provides data on the daily volatility of a currency pair. We’ll see how to use ADR to find hidden support and resistance areas on the chart, and how to generate short-term trading signals from these levels.
The daily average range shows the average pip range of a Forex pair measured over a number of time periods. Traders can use ADR to visualize potential price action outside of the average daily movement. When the ADR is above average, it means the daily volatility is higher than usual, meaning the currency pair may expand beyond its norm.
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ADR can also be useful for setting goals for the positions you are in. For example, if the ADR shows you that a Forex pair has an average daily range of 85 pips, it might be a good idea to tighten your target if a price move has reached or is close to this expected range.
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ADR is also useful for intraday reverse trading. For example, if a currency pair hits the top of a daily range, it may be due to a reversal, and you may want to consider a mean reversal strategy to catch a potential retracement.
Before we dive into how we can use ADR to trade, we should take a moment to understand the composition of the indicator. The indicator has a very simple and easy to understand formula, which will be discussed next.
Calculating the daily range of a currency pair is a relatively simple process. You simply take the distance between the daily highs and lows of a currency pair. The technical indicator is fully customizable and you can configure it to take into account as many time periods as you want. Let’s see an example of how the ADR calculation works:
Let’s say we adjust our ADR indicator to account for five days. The distances (range) between the highest and lowest points for each of these days are:
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The more periods you include in the calculation, the more “n” values you will have and the higher the divisor of the formula will be. So let’s say you take a 1 year term for your ADR. This would mean that you will have 260 “n” values in the formula, since there are 52 trading weeks in a year and five trading days in a week (52 x 5 = 260). This means you add 260 “n” values, which you need to divide by 260.
Luckily, you don’t have to do this manually yourself, as your trading platform’s ADR indicator will perform this calculation. You just need to select the period entry you want the ADR to take into account.
The ADR indicator has a very simple output and in most cases you will see additional text with the output values on your chart after applying the indicator. The ADR indicator should show you a number for the n-period ADR value.
Above we have a daily chart of the EUR/USD currency pair within the MT4 platform. We have attached the ADR indicator to the chart. Although you may not see the tool, it is in the upper left corner of the chart. It has been marked with a small orange rectangle.
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There are two values here. The first displayed with the orange arrow is the 15-period ADR, and the second displayed with the red arrow is today’s ADR value (last bar).
The 15-day ADR shows the number 1165. This value corresponds to 116.5 pips and today’s ADR value (current bar) shows 528, which corresponds to 52.8 pips. Keep in mind that depending on your chart settings and the particular ADR indicator, the way you read the pip value may differ.
Returning to our example, the average daily movement of EUR/USD over the past 15 days is 116.5 pips. But for today, EUR/USD only moved 52.8. This means that EUR/USD has been relatively quiet today so far. This can be valuable information for the trader regardless of the strategy used.
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To build the current ADR range, you need the current daily minimum and maximum. To find the upper and lower levels of the ADR range in the chart, you need to use the ADR value as follows:
We have a 15 day ADR indicator in the chart above. The 15-period ADR value is 1028, which equals 102.8 pips. When we apply the 102.8 pip spacing from the daily high and low, we get the two red dotted lines you see in the picture.
In our case, we use a more advanced ADR indicator, where the upper and lower level of the range is plotted automatically. Depending on the ADR indicator you use, you may or may not have certain features.
Unfortunately, the ADR indicator is not included in the MT4 platform by default at the time of writing. You will probably need to manually download and add the indicator to the platform if you are using Metatrader.
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Before you can add an ADR indicator to your chart in Metatrader, you must first find an online version of the indicator. You should be able to find one within the MQL4 community.
Once you find one that suits your needs, you need to download the indicator .mql file and save it somewhere on your computer. Be sure to remember where you saved the file so you can find it later.
Next, you need to open your MetaTrader 4 platform. Go to File>Open Data Folder. You will see a standard folder window appear on your screen. In the folder you need to go to MQL > Indicators. This is where you will drop the .mql file for the Average Daily Range indicator.
After that, you need to restart your MetaTrader4 terminal. When you open the platform, you need to go to Insert>Indicators>Custom. You should be able to see the new ADR indicator there. Be sure to change the settings before adding it to your chart.
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After applying ADR to your chart, you can use it in several different ways depending on your personal trading style. We will look at an example of how ADR can be applied as a trading strategy.
The first case is when the price action crosses the upper or lower level of the daily range. In this case, you might want to open a trade in the direction of the breakout.
The second case is when the price action reaches the upper or lower level of the daily range and bounces from it. In this case, you can consider a trade in the direction of the rebound.
Always use a stop loss order when trading leveraged instruments. If you are trading an ADR breakout, it is best to use your knowledge of the price action to place your stop-loss in a logical place. The same is true if the range is bearish.
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If the price action bounces off one of the ADR levels and you are trading in the direction of the bounce, your stop-loss order should be placed beyond the swing created by the price bounce.
The ADR indicator can be a useful guide and give a better picture of the potential you have with your trade. For example, if the historical average daily range of a Forex pair is 80 pips and the price action for the day is close to hitting that range, it would make sense to consider trailing your stop a little closer. assuming that the price move has probably reached its limit for the day.
Now let’s look at an example of an ADR trading strategy. In the image below you see a chart with the daily ADR indicator.
This is the H1 chart of the USD/CHF Forex pair for December 13-14, 2016. The image shows the values of the ADR indicator in the upper left corner. The ADR is adjusted to take account of 15 days. The two blue horizontal lines represent the upper and lower levels of the average daily range. The ADR indicator we use here allows us to automatically plot the upper and lower levels of the ADR.
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The black arrow points to the start of the trading day. As you can see, the price action begins a gradual move towards the lower level of the daily range. Suddenly, the price approaches the low level of the range and touches the level. A bullish bounce then appears.
Additionally, a candle similar to a hammer reversal or pinbar candle has formed. When a candle closes
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