ADR Node
Average Daily Range
Overview
The Average Daily Range (ADR) measures the average distance between the high and low prices over a specified lookback period. It provides a quantitative measure of price volatility and is essential for risk management and position sizing in trading.
ADR helps traders understand the typical intrabar price movement, enabling more accurate entry and exit planning. By knowing the average range, traders can set appropriate stop-losses and profit targets that account for volatility. Rising ADR indicates increasing volatility, while falling ADR suggests consolidation.
Unlike indicators that look at closing prices, ADR directly captures the full price movement within each period, making it particularly useful for swing traders and position traders.
Formula
The ADR is calculated by taking the Simple Moving Average of the high-low range over a specified period:
For example, with a 14-period ADR, you sum the high-low range for the last 14 bars and divide by 14. This smooths out daily fluctuations while capturing the persistent volatility trend.
Parameters
| Parameter | Type | Default | Description |
|---|---|---|---|
| period | number | 14 | The lookback period for calculating average range. Typical values are 5-20. |
💡 Tip: Use shorter periods (5-9) for intraday trading and longer periods (14-20) for swing trading.
Common Use Cases
1. Volatility Trending
Monitor whether ADR is rising or falling to identify whether volatility is expanding (good for breakouts) or contracting (good for range trades).
2. Risk Management
Set stop-loss levels at 1-2x the ADR distance to account for normal price volatility and avoid being stopped out by noise.
3. Position Sizing
Reduce position size when ADR is high and increase it when ADR is low. This keeps risk constant across different market conditions.
4. Entry/Exit Range Planning
Use ADR to determine realistic profit target distances. If ADR is $2, targeting $5+ profit per trade aligns with market conditions.
Popular Period Settings
| Period | Timeframe | Use Case |
|---|---|---|
| 5 | Intraday | Day trading, responsive to volatility changes |
| 10 | Short-term | Scalping and fast trading |
| 14 | Medium-term | Swing trading (default, balanced) |
| 20 | Medium-term | Monthly trend, smoother readings |
| 30 | Long-term | Position trading, less noise |
Advantages & Limitations
Advantages
- •Directly measures price volatility
- •Simple and intuitive interpretation
- •Captures full intrabar price movement
- •Excellent for position sizing and risk management
- •Works across all timeframes
- •No lag compared to many volatility indicators
Limitations
- •Does not indicate direction of price move
- •Gap-prone in gapping markets
- •Different for different timeframes
- •Lagging indicator (smoothed by SMA)
- •Not predictive of future volatility
- •Affected by extreme price movements
Tips & Best Practices
📊 Multi-Timeframe Analysis
Compare ADR across different timeframes to understand the volatility environment. Rising ADR on daily charts combined with falling ADR on intraday suggests a big move building.
⚡ Dynamic Stop-Losses
Set your stop-loss distance based on current ADR rather than a fixed percentage. When ADR is high, use wider stops; when ADR is low, use tighter stops.
💰 Profit Target Sizing
Set profit targets at 2-3x the ADR. If ADR is $1, target $2-3 profit. This ensures targets align with actual price movement capability.
⚠️ Avoid Trading Low ADR Days
When ADR drops significantly below its average, price may be consolidating. Consider waiting for ADR to expand again before entering positions.
Example Strategy
Here's an ADR-based risk management strategy for any trade:
ADR-Based Position Management
1Calculate ADR
- →Add ADR(14) to your chart
- →Note the current ADR value
2Set Position Size
- →Risk Amount: Your desired loss per trade (e.g., $100)
- →Position Size = Risk / (ADR × Stop Multiplier)
- →Use 1.5x ADR as stop-loss distance
3Profit Target
- →Target 1: +2x ADR (conservative)
- →Target 2: +3x ADR (aggressive)
- →Risk-Reward minimum: 2:1
4Example Trade
- →Stock XYZ has ADR = $2.50
- →Stop Loss = Entry ± ($2.50 × 1.5) = ±$3.75
- →Profit Target = Entry + ($2.50 × 2.5) = +$6.25
- →Risk-Reward = 2.5:1.5 = 1.67:1 (good)
Related Indicators
ATR (Average True Range)
Similar to ADR but includes overnight gaps, providing a more complete volatility picture.
NATR (Normalized ATR)
ATR expressed as percentage of price, making it comparable across different price levels.
Price Range
Raw high-low difference without smoothing, showing daily volatility in its pure form.
StdDev (Standard Deviation)
Statistical measure of price dispersion, useful for Bollinger Bands and volatility analysis.