Powerful Indicator: Average Daily Range
Every single currency pair has a daily range. The daily range is measured from the high of the day to the low of the day. For example, if in a particular day the GBP/USD made a high of 1.9500 and a low of 1.9380 the daily range for
that day was 120 pips. Now, a specific days daily range is not relevant. What is important is the average daily range over a specific period of time. Why? Simply because on any given day the range might have been out of the
ordinary due to several reasons such as a news announcement, a holiday etc. This day's range might not reflect the true range of the currency pair.
The way I calculate a currency's average daily range is very simple. I go back about three months and I record the difference between the high and low of every day within these three months. After that, I simply add all the data I
gathered from this time period and divide it by the number of days in the sample. This will give me the average daily range of the currency pair within the past three months. This number will reflect the true range of the pair rather than the range recorded on any specific individual day. Hence, it is more accurate and more reliable.
So, why go through all this trouble of calculating a currency's average daily range? Well, depending on the currency pair you are trading, this might help you establish more accurate rules for your forex trading system.
As an example, suppose you know that the average daily range of a certain pair is 90 pips. This means you can now enter your trades, set your stop losses and profit objectives with more precision. Suppose you are using a system that goes for a fixed 60 pip profit. Now, a long signal is triggered at a point were the pair has already moved 40 pips on that particular day. You know that if you place a long trade now the currency pair would have to move 60 pips more in order for it to reach the profit objective. However, these 60 pips more means that the
currency pair you are trading would have to have a total daily range of 100 pips. But remember, the average daily range of that pair is only 90 pips. This means that you might want to reconsider your profit objective.
Another example could be when you are designing a forex trading system. It is good to know the average daily range of the currency pair you are designing the system for so that you can calculate realistically the profit objectives. If you know that the pair moves on an average 120 pips per day, you would not set your systems parameters to take a 400 pip profit in 2 days!
Average daily range is just another tool I use to give me a better read of the current market conditions and a currency's "personality". I think it is an important one that not to many traders use. Sure, many traders know more
or less the daily range of any specific pair, but do your homework and you will know not "more or less" but exactly.
Remember, as traders we need all the advantage we can get over the competition!
I wish you all the best in your trading,
With over 10 years of experience, Avi is a veteran forex trader and educator. He developed the Price Driven Forex Trading (PDFT) method.