Average Daily Range, Setting Realistic Targets

[Fairman]

Average Daily Range, Setting Realistic Targets

Many traders set targets based on hope rather than data. A 200 pip target on a pair that typically moves 70 pips a day isn't ambition, it's a mismatch.

diagram.png (35.67 KiB) Viewed 62 times

The average daily range (ADR) tells you how far a pair usually moves in a day. You can calculate it by averaging the high-minus-low of the last 10 to 20 days. Many platforms include an indicator for this.

How to use it:

1. Set realistic targets. If the ADR is 80 pips and price has already moved 70, further movement may be limited. A new long target of 60 pips is probably unrealistic.

2. Gauge potential. Early in the day, when little of the ADR has been used, there is more room to run.

3. Choose appropriate stops. Stops should be small relative to the ADR, but large enough to avoid noise.

4. Compare regimes. Volatility changes. A pair's ADR can double around major events.

5. Plan your position size. If stops need to be wider on volatile days, reduce size.

Example: ADR is 90 pips. You enter at 7:30 a.m. after only 20 pips of movement. A 60 pip target is plausible. If you enter late in the day after 85 pips of movement, the same target is a stretch.

Not every move respects the average, but it provides a useful reality check.

Let data temper your imagination.

[PropScalpDesk]

One refinement to the 10-to-20-day average: use the median of those daily ranges rather than the mean. One payrolls Friday or rate-decision day can add 150 pips to the window and lift the "average" for two or three weeks after it, which makes targets look more achievable than they really are on an ordinary Tuesday.

Also, the part of the ADR "already used" is the day's current high minus low, not how far price is from the open. A day that ran 45 pips up and then came 40 back has used 45 of its 90, even though it's nearly flat on the day, and either extreme can still extend. Your 7:30 example works for that reason: only 20 pips of range printed, so a 60-pip move fits inside a 90-pip ADR with room left over.

For scalping I look at the same thing on a smaller scale, how much of the typical London-session range has been covered by the time I want to enter.

[LondonNewsTrader]

Compare regimes. Volatility changes. A pair's ADR can double around major events.

On point 4, it's worth separating the ADR from the event day itself. A 20-day average on EURUSD might be 70 pips, but on payrolls or a central bank day the range can easily reach 100 or more. That doesn't mean the ADR is wrong, it means the event day is a different distribution, and the release usually happens after most of the morning range has already been used.

So in your example of entering late after 85 pips, the answer depends on the calendar. On a quiet day, 85 pips used is stretched. On a US data day, a release at 13:30 London time can produce another 60 pips in minutes, and the "late in the day" logic doesn't hold.

I'd also look at the ADR excluding event days. It gives a more realistic baseline for quiet days, and you can plan the event days separately.

[Shadow Trader]

PropScalpDesk's median suggestion is easy to check on your own data, and the gap surprised me the first time I ran it. Two big days were enough to drag my average up for weeks.

img_12707_r1.png (43.93 KiB) Viewed 2 times

The chart uses a made up 20 day EURUSD window with one payrolls Friday at 142 pips and a rate decision day at 128. The mean comes out at 78 pips while the median is 70, and with those two days removed, as LondonNewsTrader suggests, the median is 68.

That 8 to 10 pip gap is the whole target on some of my scalps. Using the mean, a day with 20 pips already printed seems to have 58 left, while the median says closer to 50.

For London scalps I go one step smaller and keep a median of the 07:00 to 11:00 London range alone. If that window has already covered most of its usual size by the time I see a setup, I take the nearer target or skip.

How many days do you all use? Twenty felt slow to react after volatility jumped in the spring, so I now keep a 10 day median beside it.