Master Market Volatility with the Average Daily Range (ADR) Indicator on TradingView

If you are looking to refine your trading strategy by better understanding market volatility, the Average Daily Range (ADR) indicator is a tool you need in your arsenal. In a recent tutorial on the TradingView channel, Stuart walks through exactly what the ADR is, how to set it up, and how to use it to make smarter trading decisions.

Here is a summary of the key takeaways to help you get started.

What is the ADR?

The Average Daily Range (ADR) measures the average volatility of an asset over a specific period. It calculates the difference between the daily high and low, averaged over a set number of days.

Standard Setting: The default length is 14 days.
Calculation: (Daily High – Daily Low) / Number of Days.
Example: If the 14-day ADR for a stock is $21, it means the price typically moves by an average of $21 per day.

Why Use the ADR?

The tutorial highlights three main benefits of incorporating this indicator into your trading plan:

Improved Stop-Loss & Take-Profit Placement: Instead of placing stops arbitrarily, you can use the ADR to gauge how far price might reasonably travel. If the ADR is $21 and price has only moved $5, you know there is plenty of potential range left, which helps in avoiding tight stops that get stopped out by normal noise.
Better Position Sizing: Understanding the potential range allows you to adjust your position size to align with the asset’s volatility.
Forecasting Volatility: By comparing the current day’s range to the ADR, you can gauge market energy. If an asset has only covered 20% of its ADR by midday, you might anticipate more volatility in the afternoon. Conversely, if it has already hit 90% of its ADR, the move might be exhausted.

How to Set It Up on TradingView

Go to the Indicators tab on your chart.
Search for “ADR” and select Average Daily Range.
Customize: In the settings, you can adjust the length (e.g., 14 for standard, 5 for intraday, or 25+ for swing trading) and style (line vs. histogram) to fit your preference.

Practical Application

The video demonstrates using the ADR on a Tesla chart. By identifying the average range, traders can visualize potential support or resistance zones based on volatility limits.

Reversals: You can spot potential reversal points where price hits its average daily limit.
Context: It helps put price moves into perspective. A $20 move on a $480 stock is a 4.2% change, whereas the same move on a $150 stock is a 13% change. The ADR helps normalize this volatility across different assets.

Limitations

Like any tool, the ADR isn’t a crystal ball. Market behavior changes, and volatility shifts over time. The tutorial advises using the ADR in conjunction with other technical analysis tools and confluences rather than relying on it as a standalone signal.

By adding the Average Daily Range to your chart, you gain a statistical edge in understanding what “normal” volatility looks like, helping you trade with more confidence and precision.

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