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Average Daily Range (ADR)

Overview

  • Average Daily Range (ADR) is a technical indicator that measures the average price range of a stock over a specific period of time, I most look back up to 20 trading days to calculate the ADR.
  • It's good indicator of how fast stock can go up or down
  • High ADR% is good indicator if stock is capable of showing strong momentum or not
  • A low ADR stock will give you favorable move but it will crawl like snail while high ADR stock will fly like a bird

Calculation

  • The ADR is calculated by taking the difference between the high and low price of each trading day, summing these differences over the specified period, and then dividing by the number of trading days in that period.
  • For example, if we are calculating the ADR over a 20-day period, we would take the high and low price of each of the 20 trading days, calculate the difference for each day, sum these differences, and then divide by 20 to get the average daily range.
  • The formula for ADR can be expressed as: 
    ADR = (Sum of (High - Low) for each trading day) / Number of trading days

Interpretation

  • A higher ADR indicates that the stock has more volatility and is likely to experience larger price movements, which can provide better trading opportunities.
  • A lower ADR indicates that the stock has less volatility and may not provide as many trading opportunities, especially for short-term traders who rely on price movements to make profits.
  • When selecting stocks for trading, I prefer to look for stocks with an ADR of 3% or higher, as these stocks are more likely to provide good trading opportunities due to their higher volatility.
  • However, it's important to also consider other factors such as the overall market conditions, the stock's trend, and its liquidity when making trading decisions, as a high ADR alone does not guarantee a successful trade.

Warning

Don't think ADR to be kind of assurance that stock will only go up, if it has the potential to go up quickly, it has potential to come down even quicker.