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Hi Sandy,
It sounds like your daughter is reading quite well to be at level 5 so early in the term. The levels are the same used in the Reading Recovery program, and there are 30 in total. It is very hard to find estimates on what level a child should be at by a particular age, probably because at this age their levels can be so varied. The state minimum benchmark (Vic) is reading at level 1 by the end of prep, and level 5 by the end of year 1, but at many schools the majority of children will read at much higher levels than this. A local private school I visited told me they like all their year 2 children to get to level 20 by the end of the year, which I think is a fairly standard target, but you will find some prep children who finish the year on a higher level than this. As I say though, she is off to a very good start!
With regard to being surprised at your daughter's reading level, I wonder if she may have been able to read more words than you realised (I have heard stories of kids suddenly reading for their parents when the parents had no idea the child could read!), or it could be that she just picks up new words quickly and has already learned a lot in the first few weeks of school.
Good luck for the rest of the year!
Annabel.
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