Daily range of any Forex pair is the difference between the high and low on any previous trading day. Now, this tells you the range in which the Forex pair had moved the previous day. But when you calculate the Average Daily Range of any Forex pair, it means taking the average of the daily ranges of any currency pair for a large number of days.
This statistic is important when you are trading intraday as it gives you the idea how much volatile a currency pair is on average. This statistic can change from one year to another as the market conditions change.
For example, you are trading intraday. The currency pair has an average daily range of 80 pips. It has already moved 70 pips, then it would be wise to not open a long position as the odds are highly unlikely that the currency pair will not move much. But suppose, the currency pair has only moved 20 pips during the day and there are many hours left in trading, you can open a long position as there is still enough room for the currency pair to move.
So, how do we calculate the Average Daily Range? By taking the difference of the high and low of the trading day, you calculate the daily range. But you must be consistent. if you are taking the London Open/Close then stick with it and if you are taking the NY Open/Close then you must use it consistently. If some of the day is based on London Open/Close and the other on NY Open/Close then you are of course going to get erroneous results.
Understanding this statistic is important as they help you develop effective risk and money management strategies if you are an intraday trader. It is a good idea to calculate this statistic on a yearly basis plus half yearly basis. Why, because sometimes back, EURUSD currency pair had an average daily range of around 40 pips and it exploded to more than 150 pips.
Always keep this in mind this statistic can change as the underlying market conditions change. But, you don’t have to worry too much about this statistic either. Many traders simply don’t bother about this statistic and neither should you. Simply follow the trading system and when it says to enter and when it says to exit simply exit. Place the stop loss as per rules of that system. It is more important that you stay disciplined in applying the rules of a trading system. Good Luck!