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Hello,
As far as I understand from this forum and the third book, there are 2 ways to determine the expected average daily range. Please correct me if I am wrong about anything in this post.
1. Using a simple average of the prior 3 days (does not have to be 3).
2. Using the VIX.
This is what I read in the third book about the VIX on page 439:
"Incidentally, every 16 points in the VIX corresponds to a 1 percent expected average daily range in the S&P 500 index (so a VIX of 32 means that the average daily range of the SPY and Emini is about 2 percent)"
My question is which average daily range calculation does Al and all you traders use? I see they are fairly similar numbers (at least right now) with the simple average being 45.23 points and the VIX calculation being 53.58 points. The point behind this question is, that I just want to start off using the "correct" average daily range.
Replies are very appreciated,
Andreas
Hi Andreas,
I use ATR indicator on daily chat and just left it at the default setting it comes with ATR(14) since I assume most traders will leave it at default too. I use the same one on 5M timeframe to give me an idea of the minimum scalp of the day. I don't think there's any one correct value or that it needs to be too precise, it's probably more important just to keep it consistent day to day and not change whichever setting you pick.
If your platform offers ADR indicator that may actually be better since it excludes gaps between closing/opening prices.
Hope that helped!
Cheers,
CH
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Hello,
I use the Ultimate ADR price alerts, which is an Indicator in Trading View. It is free and works on any time frame, and is very accurate. Here are the weekly and daily ATR ranges as produced by this indicator.
Thank you both.
I have decided to go with a 14 day ADR as it was available. I will stick to this to keep the number consistent. 👍
What is average daily range used for
The idea is to have an expectation of how much more the day may expand. For example, if average daily range is 60 and price has already moved 55 in some trend then probably not much left before starts converting into TR. Or if opening range is 30 points then if breakout happens can reasonably expect the range to double for 30 points so a swing may be possible.
Some other uses for knowing daily range:
If an opening gap is about half ADR then a trend is possible in the direction of the gap.
If an opening gap is >ADR that's a huge gap and a TRD is more likely.
Knowing the range may help with setting better targets when using Measured Moves. For example, if a daily range is 60pts and an opening range is 10pts then if breakout happens a profit target of +10 is possible but that's too small compared to daily range and a trader shouldn't take profits too early.
Al often mentions that an opening range that's 1/3rd of ADR is basically Breakout Mode and a breakout in either direction may lead to a successful trade.
In the books Al describes average stoploss of 2 points when ADR is 15pts (this was many years ago). So ADR has a relationship with average size of stoplosses, probably because size of average bars is affected by ADR. Imagine ADR of 15, that probably means small bars so stoplosses don't need to be far away. Imagine ADR of 60, probably the bars are much bigger on such days so stoplosses will be farther away too. Maybe something to think about for traders who are always using same size money stops??
There are many more examples that Al describes. If you own the e-books your reader may allow you to search for "average daily range" and you will find all the times Al talks about it.
Hope that helps!
Cheers,
CH
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