About average daily ranges
Average daily ranges are important for gauging volatility in the Forex market. If pairs are not ranging much, price is less likely to meet your targets. When I notice ADRs dropping, I tighten my support and resistance areas, and lower my targets.
I may give up trading a pair all together if its average daily range (ADR) drops too low. For example, if I notice that AUD/USD has had an ADR of 50 pips for the last month, I may stop trading it; the normal ADR for AUD/USD is 99 pips, so a fall to 50 pips makes it too difficult to trade effectively.
Price action is all about trading price movements, that is what my price action strategy is based on. If price isn't moving, trading price action can become quite tough. This is why I monitor ADR closely.
The charts below show the changes in the average daily ranges by year for EUR/USD, GBP/USD, AUD/USD and GBP/JPY.
EUR/USD average daily range
In 2014, EUR/USD dropped to it's lowest average daily range in close to ten years; this made trading the pair torture, as volatility dried up, the trades dried up. Luckily, things have picked up again this year, and we are seeing a lot of great movement so far.
Unfortunately, Not all volatility in EUR/USD has been good this year. Much of the volatility can be attributed to the Greek debt crisis, which is causing erratic movements that are dangerous to trade.
GBP/USD average daily range
Average daily ranges for GBP/USD are sitting near four year highs. The boost in volatility has been great for price action trading, especially after last years low ranges.
AUD/USD average daily range
Along with most pairs, AUD/USD experienced a huge boost in its average daily ranges in 2007. Sadly, in 2012 AUD/USD dropped back down to it's 2007 ranges, and hasn't made it back up since. This year is looking very good so far, with the average range sitting at 99.91. Traditionally, AUD/USD takes off in September through to December; if it happens again this year AUD/USD might crack the 100 pip ADR barrier.
GBP/JPY average daily range
Back in 2007 through to 2009, GBP/JPY was my favorite pair to trade. Some days, it would move 2,000 pips in a matter of hours. These days, GBP/JPY has slowed down tremendously. The average daily range for 2008 was 346 pips, this year it is 178 pips, which is almost a 50% drop. No other pair I monitor has had such a drastic change in its average daily range since 2008.