ka66: ADR Estimation

25 apr

This is based on Daryl Guppy's Average Daily Range indicator, the link is difficult to find, but it is an estimation/projection indicator for a daily range.

The thesis is (if I understand correctly):

The range (high - low) of a particular day can be determined, with 85% probability, by taking the ranges of the last 5 days, and getting their average, then multiplying this average value by 0.75. This final value is the estimated range for the next day.

The indicator does not say anything about potential direction, so it may be used as a Take Profit or Stop Loss estimator for the trading strategy in use. Either on the daily timeframe, or an intraday timeframe.

And if we enter the market intraday for a day trade, when the day's range has already exceeded or is close to exceeding the estimated/projected value, perhaps the move is already quite exhausted, and the trade needs to be reconsidered.

A further implication is: if 0.75 multiple occurs with 85% probability, then a lower multiple is even more probable, if one was looking for a more conservative estimate.

The indicator shows three things for a visual inspection of the validity of this concept (and allows basic customisation of parameters):

1. The day's range, shown in a translucent gray/deep green, as columns. This is the current bar's range. If intraday, it will repaint.
   
2. The 5 day average up to the current bar, shown as a step-line plot in orange. If intraday, it will repaint.
   
3. The projected range: a thinner blue histogram column, this is offset one bar forward, as it is a future estimate/forward-looking. It too will repaint if the current day is still not complete.
   

To evaluate the historical results of the chosen settings visually (eye-ball it!), compare the blue histogram bar to the gray bar/column, i.e. the estimate vs. actual range:

• When the blue bar is generally within the gray column, and close enough to that column's size/range, then the projected estimation has been reasonable.
  
• if the blue bar tends to be relatively smaller than the gray bar, then we are underestimating often. Increase the projection multiple setting, as a simple fix.
  
• if the blue bar tends to exceed the range of the gray bar a lot, we are overestimating often. Lower the projection multiple setting, as a simple fix.
  

Guppy's document says that they basically calculate this ADR for multiple markets and focus on markets with the top 5 ranges (in descending order, of course), to maximise the profit potential on intraday trades planned for the next day. Because it is an estimation, this calculation can be run at the end of the day on completed bars.

This indicator also allows displaying the value as percentages, taking the logic of the ATR% (ATR Percent) indicator, which divides the ATR by the close value and multiplies it by 100 to get a normalised percentage value, allowing it to be compared across markets (but in the same timeframe!).

25 apr

Note di rilascio

Give most recent projection a different colour to highlight it prominently, a hot pink by default.