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Daily range and average daily range to prospect market volatility and targets

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The Average Daily Range indicator is a great tool that plots the price excursions each session on any timeframe, despite its name suggests an implicit use on a daily timeframe.

The indicator is calculated based on two metrics:

  • Daily Range: the difference between high and low of the current period: (high – low); can be a day, a week, a month, etc…depending on which timeframe the indicator is plotted
  • Average Daily Range: the average of the daily range over a certain amount of periods

The available settings of the indicator are the following:

  • Periods: the number of sessions through which the daily range is calculated. (1 by default) can be unlimited depending on the range (highest high – lowest low of the last x periods) that you decide to analyse
  • AVG: the amount of periods which the average is calculated on (10 by default)

Once plotted, the indicator shows histograms of three colours:

  • Grey: the range of the current periods is somewhere in the average of the last AVG periods (Average range)
  • Blue: the price excursion of the period is above the average of the last AVG periods by at least 25% (Wide range)
  • Pink: the price excursion of the period is below the average of the last AVG periods by at least 35% (Narrow range)

In addition, you are free to add the following lines:

  • AVG Range: the average range of prices over the last AVG periods chosen
  • AVG Wide: the theoretical extended average range of prices over the last AVG periods chosen, which is AVG Range * 1,25
  • AVG Narrow: the theoretical compressed average range of prices over the last AVG periods chosen, which is AVG Range * 0,65

A Wide and extended range typically precedes quieter ranges where we can expect a reduction in price volatility.
Conversely, a narrow and compressed range usually leads to increased volatility where prices could be seeking significant expansion.

Hint: it can be useful to analyse periods of compression to anticipate potential expansion by combining these sets of settings:

  1. AVG 10 PERIODS 1 : 10-average of 1-day ranges
  2. AVG 10 PERIODS 3: 10-average of 3-days ranges
  3. AVG 10 PERIODS 5: 10-average of 5-days ranges
  4. AVG 20 PERIODS 3: 20-average of 3-days ranges
  5. AVG 20 PERIODS 5: 20-average of 5-days ranges

Example: When trading for expansi0n out of a compressed 5-days range, you can set your targets by utilising the AVG Wide line value of the indicator.

 

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