A conversation on twitter the other day made me realise that the concept of Average Ranges isn’t widely followed. Not to be confused with repeating ranges (measured moves) or ATR (Average True Range), Average Range is simply the value of an instrument’s high minus its low (H-L) for any given period (Day, Week, Month) and then averaged by a chosen number of periods.
Below is a daily chart of AUD/USD with the (custom) indicators I use for Average Range.
[click on chart to open in new tab]
The black indicator at the bottom shows the average range for the past 20 periods. We see that the current average daily range (ADR) for AUD/USD is 93. What does that mean? It means that on average, in any daily period, the difference between the high and the low will be 93 pips. It means that on average, in any daily period, there will be a 93 pip move from low to high or from high to low. But that is only an average: sometimes it moves more, sometimes it moves less, so lets look further. The red indicator shows the single period % of average range. This tells us what percentage of the average range the instrument has moved in the past. A quick glance at the chart above shows us that AUD/USD completes at least 50% of its average daily range nearly every day, often more. This is powerful stuff. We can be almost certain that price will move at least 46 pips nearly every day. (A notable exception is the period between Xmas and New Year). For those statistically minded, very useful information can be extrapolated from this simple data: eg, 70% of average range gets completed 4 out of 5 days; 100% completions occur half the time, etc. The blue indicator simply shows the actual range of any one period. The whole concept is based on nothing but price and the movement of price. No other TA required – no momentum, no relative strength, no trend, no divergence, no moving average. Nothing but price and the knowledge that it will move.
The idea is the same for weekly, monthly, quarterly, yearly or whatever period you wish (AWR, AMR, AQR, AYR). In any give period price can be expected to move a certain amount with a good degree of certainty. There are a number of ways an actual trading plan can be based around average ranges but that will have to be in another post.
(I couldn’t publish this without acknowledging the role of Rob @RobTTTrade in introducing the concept of average ranges to me. Videos of how Rob applies average ranges to trading can be found here here here & here.)