The average daily range is one of those concepts that truly captivates traders. People imagine the amazing possibilities that they will be able to create using this tool in their trading.
Many traders believe that if the price rallies to its daily range, they should sell it, and vice versa.
Unfortunately, it’s not quite that simple. So I am going to explain why using the average daily range purely for profit targets is the best idea. Because trying to cram it into every possible trading scenario can be bad news.
Why Doesn’t The Average Daily Range Work For Entering The Market?
Firstly, the average daily range only provides a guide on the kind of volatility that can be expected from a currency pair during the session. It does not tell you how many pips (up or down) it will actually move. In fact, the average daily range has absolutely no bearing on how many pips the price may move during a session. Such moves are driven entirely by fundamental factors.
This means that if the average daily range is 30 pips, but the central bank of the country announces they will be cutting interest rates by 3% next week, you can expect the market to fall a lot more than its 30 range.
This is why you should not buy or sell at the extremities of the daily range without expecting an inconsistent performance. Anything can happen to drive the price – any distance and in any direction – at any time.
So does this mean that the average daily range is useless? Far from it. It just means that if you base any trading on ADR you have to consider it a bit more carefully…
Use the Range as a Guide for Profit Targets
Using the range as a guide for profit targets will allow you to hold a position and gauge the market’s reaction when it gets there. If it continues, you can hold. And what if it shows signs of exhaustion? You can be sure that the volume for that particular currency has dried up at around the usual levels.
This strategy will also allow you to calculate your entries into the market with much more clarity. If you see that the pair has already ran most of its range, you might reconsider entering the market at that point, for fear of the market correcting and retracing from the highs / lows. This will also save you from losing trades and pips.
The best way to become comfortable with this concept is to apply it to your charts and practice. (This is true for most trading concepts.) Watch the reactions that occur at these areas when you use them as profit targets. Remember that this should be part of the entry decision process, rather than a simple ‘enter here’ method.
Use the average daily range purely for profit targets. Do not try to cram it into every possible trading scenario. (Click to Tweet)
After a few weeks you will start to see the power and effectiveness of the daily range, but only when used correctly!
P.S. – If you want to learn more about how I trade, check out the link below
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