There are times where I will trade without the need for any confirming price action. Before we dive into the details I want to make one thing very clear. This is an advanced trading strategy , so if you are still finding your way with the more traditional price action strategies on this site, I recommend sticking with those for now.
But more about that later. As you may have guessed, a strategy that is based in part on the average daily range should be traded on the daily time frame. Not only is this time frame needed for this particular strategy, the daily time frame as a whole is more predictable and consistent when trading any price action strategy.
This is why everything we do here is based on the 4 hour and daily time frames. While there is no hard definition, a key level is one that is obvious. It sticks out like a sore thumb and practically begs you to trade it.
The golden rule when looking for key levels is to stick to the higher time frames. While the 4-hour chart can be great for this exercise, the daily time frame is far more effective. Another common theme on this site is that of trading with the momentum. Having market momentum in your favor means flowing with the market rather than trying to fight against it. Simply put, when you trade with the momentum you are trading in the same direction as the big boys banks, hedge funds, etc.
The idea behind Average Daily Range ADR is that each market has a unique range that it typically covers in a single day.
This of course, can change over time depending on factors like seasonality and volatility. The easiest way to determine the average daily range is to simply view the daily candles over the past month or two.
Measure a few candles with larger ranges and then measure a few with smaller ranges and take an average. The idea here is not to get an exact measurement or average, only to get a general understanding of how far a market is likely to move in a given day. By doing this we can get an idea of what is probable and thus put the odds in our favor. But just wait until you see how the factors above compliment each other.
The very first thing to point out is that we are on the daily time frame. We also have two key levels in play in the form of support and resistance. The following chart explains why I liked this level so much. The chart above shows a snapshot from several years prior to the setup forming.
Notice how many touches there are during this period. There is also a large gap that contributed to the significance of this level.
It shows the previous nine months of price action leading up to the setup. Now for the last key ingredient — analyzing the average daily range. Notice that the daily range of the setup candle was pips. Those are the kind of odds every trader dreams about. To that I say, keep it simple. The range on that particular day was pips. Of course in order to do this you need to be at your trading desk while the setup is unfolding.
Which brings me to an important point. Not only do you need to be present while the setup forms, you should also only enter at market. In the first image you can see how we enter short at market as soon as the pair tests the key level. At that point we want to see a strong rejection in the form of selling pressure. The third image shows the market surging past the key level.
When in doubt, always err on the side of caution and protect your capital. Trading Forex blind without the need for confirming price action can be a great addition to your trading toolbox. But just like any strategy that we use, it has its rules that must be followed.
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