ADR-based strategies: trading the average daily range
The average daily range tells you what a normal day looks like, and several strategies grow from it: fade extensions beyond 100% ADR, target 50% ADR, or trade breaks when the range is unusually compressed.
How do you use ADR?
- the period and pairs you track it on
- the ADR-based rules in your plan
- how you handle days when the range already exceeded ADR
The ATR guide is the tool behind most ADR work.
Background: Average true range (ATR): measuring volatility and setting stops
ATR shows how far a pair typically moves in a period. Here is how true range is calculated, and how traders use ATR to place stops and size positions.
How is ATR calculated?
True range for each period is the largest of high minus low, high minus the previous close, and low minus the previous close, ignoring signs. ATR averages true range, typically over 14 periods with Wilder's smoothing.
What ATR multiple should I use for a stop-loss?
Many traders use 1.5 to 2 times ATR, but there is no correct number. Wider stops are hit less often and need a smaller position to keep the same amount of money at risk.
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