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Average daily range |
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WIKI ANALYSIS| This article is part of WikiProject Definitions. Consider editing to improve it. View articles referencing this definition. |
The average daily range is the average of the daily range over a given number of days.
Average daily range can be calculated over different numbers of days, so an investor must choose whether to look at, for example, a 10-day average daily range, or a 180-day average daily range - the results could differ between the two.
Tracking the average daily range as a 10-day moving average - IE, the average of the daily ranges for the last 10 days - is a common use case, particularly for technical traders.
How it's used
Comparing the current day's daily range to the historical daily range gives a measure of volatility for the stock. When the day range increases, the stock is more volatile
Disadvantage of Average Daily Range
One downside of using the Average Daily Range is that the calculation can cause problems when a stock is moving rapidly in one direction, either up or down. In such cases, the stock's lowest trading point on a given day can exceed its highest trading point on the previous day, and in such cases the Average Daily Range will underestimate the true volatility over that time period.
In such cases, the "Average True Range" will account for this issue and yield a better measure of the historical volatility of the stock.
Example
Let's say stock XYZ had the following highs and lows for the last 10 days:
| Day | Day High | Day Low | Range |
| 1 | $35 | $30 | $5 |
| 2 | $34 | $30 | $4 |
| 3 | $37 | $31 | $6 |
| 4 | $38 | $30 | $8 |
| 5 | $39 | $34 | $5 |
The average daily range would be the average of the day ranges over the 5 days - in this case the average of $5, $4, $6, $8, and $5 -- $6 dollars.
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