Average Daily Range (ADR)

The ADR is something I came across while learning about candle analysis; at the time it did not seem overly important - or maybe it did not seem any more important than anything else … the text books mention many times that a market’s movement is unique. Each market has a pattern of normal behavior and then it has periods of abnormal behavior.

When a market is acting normal - how far does it typically go in a day? Since markets generally go up and down throughout the day - how wide is the typical range for a stock each day? This is what I was learning from the text books and it was a question I wanted to answer when I built the ADR indicator.

If $TSLA moves differently than $SIRI, I can’t expect to see $SIRI make 3% and 5% moves on a daily basis … but what can I expect? What is a markets “typical” price range each day - and… what is that market doing today?

What are the ADR's...?

The ADR's are the Average Daily Range levels that I use on a daily basis. These are very similar to the ATR (average true range) but without the "front weight." I calculated these ADR levels a few years back and have been using them every day since.

At first glance - they are as they sound... they are a visual on what the daily movement is for a market. Every market has a 'pulse" to it ... it's choppy and gappy or it's violent and spiky or it makes small intraday moves or some other behavior... so when it comes to trading the same market over and over ... we want to know what it's average move is.

If the average move is 100.00$ then that means it could move up 50 and down 50 (added up - that is our 100.00 range) ... or it could move up 100 and down 100 ... that would also be our average range. Markets have a consistent movement to them - a distance that they should move within - if they are acting "normally" today.

ADR - Half & Full

The ADR's 1/2 and Full levels are not set in stone. Over time - they expand and contract with volatility (yes they are volatility indicators). So if the market has a very large move three days in a row - the ADR will grow and it will take days or weeks before it shrinks back down.

The ES (for example) may run at 0.86% ADR for weeks and weeks and then get a few large days that push the ADR into 1.03% ranges. To translate - that means the Average Daily Range would be 1.03% movement (higher or lower) starting at 6pm on the futures or starting at 9:30am on equities.

To calculate an average - we get a lot of numbers and add them all up - then divide by the total numbers ... (HUH...?) We are using a "21 day" ADR (a market month) and so that means we take the range (from high to low) for each day counting back 21 days and add them all together. Then we divide by 21 to get the average.

Generally speaking - if a market today is "doing what it typically does" then it will stay in the red lines (what I like to call the ADR-1/2 or the "ADR HALF").

If today we get bullish or bearish - then we can hit the "full ADR." If it's a "face ripper" sort of day - then we can exceed the full ADR & go another -1/2.

TOS Share Code

The ADR is a custom indicator - so you won't find it on the TOS platform but you can install it. If you look on YouTube for "how to install a TOS share link" - you will find a LOT of videos... no reason to watch one that is 5 / 10 minutes long either. Find one that is 2 or 3 minutes max.

DO NOT CLICK THIS LINK - COPY AND PASTE IT INTO TOS

TOS SHARE LINK: http://tos.mx/!dQ3sCZ2c

There is an ADR indicator on TradingView; unfortunately - it's not mine. I am having one built - so once it is done I'll share it here with everyone. If you are on a trading platform that does not have an ADR indicator - if there is an ATR then you can use that. (most of them default to 14 days - so open it up and set it to 21 days).

Take the ATR - and divide it by 2. Suppose the ATR is 62? Then divided by two we'd have 31. From yesterday's close - add 31 and mark that on the chart. Subtract 31 from yesterdays close and mark that on the chart. Now- those are the ATR-1/2. Then mark 61 above and 61 below the close of yesterday and you have the ATR full.

Typical

With these ADR levels - this is what the market “typically does” so it is a great way to get familiar with a market. You may be trading one thing over and over (like $SPY | $QQQ | ES | NQ) or you may be trading a lot of different things through the day - knowing what the typical market day looks like gives you an idea for what today is looking like.

The ADR indicator is looking back at the last month of price action- and so if price is already at the ADR-1/2 before the market even opens then we know that price today has already run to the “typical range” edge and still has all day to do something else.

It could go to the other side of the range today - or it could continue to move even farther in the same direction - making the whole ADR in a single direction! One of the best things to do with the ADR indicator is to go back into the past and look at what price as done before.

Look at how price reacts around the red lines - look at how early we managed to get to these levels and what happens after price get to these levels. Looks back at previous trading days - did price get to the red line area and sit there chopping into the close? Did we get to that red line area and turn away? Or did we drive right through the red line area and go right to the yellow area?

Here is an article that I cam across on FX-Street in NOV 2024 discussing the Average Daily Range.

Average Daily Range