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In this short article I would like to go over the
concept of Average Daily Range (AVDR) of currency pairs
traded in the forex spot market. The concept of daily
range is very important for any trading strategy you
employ when trading forex.
GBP/USDEvery 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.
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. Forex Trading System
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,
Avi Frister
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