Traders often require an insight into the nature of a particular currency. Among other indicators of volatility, measuring the average daily range forex demands special mention. It is the average of the daily price range over a certain period of time. This is important to understand the range over which a particular currency pair fluctuates to/from. In other words, this is an indicator to define whether trading a certain pair is beneficial.
Let’s say that you are trading with EUR/USD. The dramatic turn of events lead to a fall in its overall average daily range forex values. Say that it falls from 100 pips (normally) to 75 pips. No you need to tighten your support and resistance levels and it might not be too effective to trade with it right then. This is specifically important for a price action trader who depends on the fluctuations for denoting his next best alternative.
Use of average daily range forex as an indicator/guide:
Traders often consider holding a particular position depending on its highest or lowest values. The difference between the two gives its range. If the average of the range over a certain period of time increases then it implies that it is beneficial to hold that position. 3 basic reasons to take forex adr average daily range into account:
Average daily range forex helps determine the entry points into the trade. Sudden improvement in range might also lure you into reentering the trade. Retracing the highs and lows, traders may expect the market to behave normally which however depends on their position they want to stick to.
Determines range of possibilities:
Remember that moving average itself defines the range over which price may vary. For example, consider the exponential moving average. This is generally used to determine short term price ranges for example for 26 days. Traders are concerned about short-term trading may consider taking this account but there arrives a newer possibility.
Forex average daily trading range takes into account the average of the range in a certain period and not just the net price. So this includes the values of extremes into pricing mechanisms.
Convergence/Divergence from historical data:
Average daily range forex helps traders to compare the current average range with the historical range. This means that they can calculate the relative volatility of the stocks and accordingly select their trading strategies. For example, consider the EUR/USD pair. It is considered to be one of the most fluctuating stocks till date because both the currencies fluctuate much with respect to each other.
Whether you will invest you money in this pair depends on its current forex average daily trading range. Since a couple of years now this pair is suffering from a lower ADR which means that its relative value is decreasing. Although very recently it gained importance, traders are still skeptical whether to rely on it.
Prices should move in some direction to indicate whether it’s profitable for traders to trade with it. This means that if a particular currency pair is stagnant, experts ask traders to avoid it, particularly for price traders.
As a thumb rule, before settling for any particular strategy make sure that takes into account the direction of average daily range forex. You will be able to correctly determine the trend and select that price which will be benefit-able.