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# Average Daily Range

The average over n periods of the absolute difference between the high and low of each period.

Most often this is used by traders on Daily periods. So the difference between the High and Low for each day is summed for n periods and then averaged.

There is no magic (or right answer) to the number of periods n should comprise. A common look back period is n=14 (or 14 days) but there is no logic to this. In fact n=15 or n=20 arguably are more logical look back periods as they represent 3 or 4 weeks, respectively, for typical trading weeks.

Average Daily Range is also known as ADR.

The ADR Bands are often used by traders as a possible profit target or indication when price may have extended itself and be due for a reversal - they are not a trading signal in isolation.

One of the problems with the ADR calculation is it does not take into account gaps in the trading between the look back periods, as it simply taking the difference between the High and Low for each of the n periods and ignores a gap from the previous period's High or Low. For instance if the High and Low for yesterday were 117 and 100 then the daily range for that period is 17. But the previous day's Low may have been 125, so priced 'gaped' down by 8 points which are never picked up in the ADR calculation.

To get around this gap problem, many traders use Average True Range (ATR) instead of ADR. A typical software formula to calculate ATR looks like this:
HighLowRange = High - Low
HighToPreviousCloseDifference = AbsoluteValue(High - Last[-1])
LowToPreviousCloseDifference = AbsoluteValue(Low - Last[-1])
TrueRange = max(HighLowRange, max(HighToPreviousCloseDifference, LowToPreviousCloseDifference))

[source for formula: http://www.sierrachart.com/index.php...nce.html#s107]

The ADR and ATR can be calculated for either ETH or RTH, although it would seem a calculation based on ETH is the most logical eg if the RTH ATR is 12 and the ETH ATR is 16 for a given instrument, and overnight price has already moved by 10, then it seems unlikely price will move by another 12 during the RTH session.

 Created by  steve2222 , June 29th, 2016 at 04:48 AM 0 Comments, 388 Views
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