I am first going to give you some background and then answer your question. You can skip the background if not interested.
This is a very controversial topic because the pool industry, specifically the manufacturers of stabilized chlorine (e.g. Trichlor, Dichlor) products (and therefore all pool stores they sell to and sort of train (via salespeople, product literature, and computerized "problem solving" programs) and the APSP, formerly NPSI, organization they support), assert that "CYA doesn't matter; only Free Chlorine matters" in terms of levels. They point to the Pinellas County, Florida pool study as proof (I link to that and discuss it at this thread
-- note that 49 out of 486 pools with no FC and 18 of those with no combined chlorine either, none of these had green algae and in fact only 4 out of 486 pools had green algae -- ask yourself how that could be and is it consistent with your own pool and those of others if you let the chlorine go to zero). Also, "pool tech" in this recent thread
on this forum says he/she sees no correlation between high CYA and algae, but he/she does keep his/her pools at a higher 3-5 ppm FC and some of his/her pools each year do get algae -- some handled with 10 ppm FC chlorine shocking while the more difficult cases are handled with phosphate remover.
However, if you look at reports of hundreds of pool users (and some pool service people) on multiple forums, you will see that all the algae blooms (or initial dull or cloudy water) come from too little FC relative to CYA. Ben Powell, who serviced commercial pools, figured out this relationship mostly through experience and posted this chart
on The Pool Forum which he started (and the associated site, PoolSolutions
started in 1997).
I first got involved with all of this about 3 years ago after owning a pool (first time in my life) for 1-1/2 years and using Trichlor tabs/pucks and finding that my CYA level was well over 100 ppm (I have a cartridge filter, so very little water dilution since no backwashing and have an opaque safety cover so used relatively little chlorine each day). I had a harder and harder time maintaining chlorine levels (which had previously been 3-4 ppm FC) in spite of using an algaecide (not every week, though) and lots of other chemicals (since I was getting them free from a friend who works tangentially in the industry). I then decided to work out the chemistry of pool water since I majored in physics/chemistry at Berkeley, though I work in software engineering/management. I posted my results, including a spreadsheet (created over a period of 2 years as I added more to it and improved it) that calculates the relevant quantities, first on the Pool Forum, and then here
at TroubleFreePool which is essentially the main follow-on to The Pool Forum that no longer accepts new membership (Ben Powell is now out of communication and did not ship pool kits nor refund money to the last set of users who paid for them).
ANSWER TO YOUR QUESTION
The recommended Free Chlorine (FC) range used to be 1-3 ppm but was raised not too long ago to be a minimum of 2 ppm (and I think up to 5 ppm for max, but not sure about that part). At any rate, this recommendation does not take into account what happens when there is Cyanuric Acid (CYA) in the water. This appears to be a combination of an original standard that appeared before CYA was in wide use combined with a stabilized chlorine industry that has obscured the chlorine/CYA relationship and claims that though the science of it is understood, it doesn't apply to "real pools".
Most of the Free Chlorine (FC) in a pool with CYA is not actually the disinfecting form, hypochlorous acid, nor its relative that is not a strong disinfectant, hypochlorite ion. Instead, most of the chlorine is "attached" to CYA in a series of chemicals called chlorinated isocyanurates. These do not disinfect nor do they appear to inhibit or kill algae, but they are more resistant to breakdown from sunlight. CYA protects chlorine from breakdown from the UV rays of sunlight through two mechanisms: 1) direct shielding by CYA via absorption of the UV rays thus protecting the chlorine at lower depths and 2) CYA combining with chlorine to form more stable, though less reactive (i.e. not a disinfectant nor algaecide) compounds.
The amount that CYA reduces the disinfecting chlorine concentration is huge. At a pH of 7.5, a reasonable rule-of-thumb is that the disinfecting chlorine concentration is reduced by a factor equal to the CYA concentration in ppm. So at 30 ppm CYA, the disinfecting chlorine concentration is 1/30th that found with no CYA and the same FC level. The science behind this has been known for a very long time -- published in 1974.
As for high levels of chlorine being damaging to equipment and bad for swimmers, that is true when there is no CYA in the water, as with indoor pools, but is not true in pools where CYA is used, as with outdoor pools. Yes, even the small amount of disinfecting chlorine in an outdoor pool with CYA is a strong oxidizer and disinfectant and will corrode metal faster than water without such chlorine, but it's very slow compared to having chlorine without CYA. Most equipment is designed to handle the chlorine in the pool and to not corrode. However, if you were to put in standard galvanized (i.e. zinc-coated) steel into a pool, you will notice that it corrodes relatively quickly (I've seen this with paper clips that start to dull and pit in a matter of days). Stainless steel is resistant to this corrosion, though higher salt levels accelerate such corrosion (I talk about this in this thread
In fact, all reports of asthma and respiratory problems with small children and competitive swimmers (and others) are reported in indoor pools, not outdoor pools, and though most believe it's due to the poor air circulation and possibly the lack of sunlight (which helps break down combined chlorine), the fact is that the biggest factor by far, I believe, is not using CYA in indoor pools and therefore having much faster chlorine reaction rates. This hypothesis is supported by this patent
in Examples 4 and 7 that show that there is much less outgassing of trihalomethanes (THMs including chloroform) and inorganic chloramines (which would include nitrogen trichloride indicated in respiratory problems) collectively known as disinfection by-products (DPBs) when there is glycoluril in the water. Glycoluril is very similar to CYA except that it binds even more strongly to chlorine so you need less of it to get the same effect as with CYA (it still releases chlorine "as needed", just as CYA does). You should think of CYA as a chlorine buffer or holding chlorine "in reserve" -- the active chlorine is reduced so doesn't react as quickly, but the CYA chlorine buffer means that you won't run out of chlorine as quickly (so CYA makes chlorine slower reacting, but longer lasting in terms of not running out). I am currently working with several organizations around the world on this issue and trying to get CYA used in indoor pools (at least as an experiment) to solve this problem.
Your concern about the masking of a decent level of chlorine with CYA is true, but the solution is not to no longer use CYA. If you didn't use CYA in outdoor pools exposed to sunlight, then half of the Free Chlorine would break down every 30 minutes so you would have too little chlorine in a matter of hours (since it also gets used up combining with organics in the pool). Fortunately, most bacteria are very easy-to-kill even at the low disinfecting chlorine levels in CYA pools. The reason you need to keep the disinfecting chlorine level as high as you do in CYA pools is not for killing bacteria, but for preventing algae growth.
The other reason you WANT to use CYA is that the disinfecting chlorine level is too high without it. I already mentioned the air quality problems in indoor pools, but swimsuits also degrade very quickly in such pools. My wife swims all year round, but in the 5-month winter season she uses an indoor community pool that I have measured to normally have around 2 ppm FC and no CYA. Her swimsuits degrade in just one season of use and other frequent pool users at the facility have reported the same thing (the rubber wears out -- they also fade a little, but are fade-resistant so the main issue is the loss of elasticity). In our own pool with 3-6 ppm FC and 30 ppm CYA, during the 7-month summer season, there is no noticeable degradation of the swimsuits and only slight degradation after 4 years of (summer-season-only) use. The indoor pool has from 9 to 22 times as much disinfecting chlorine as my outdoor pool.
Also, the combination of salt, as with an SWG pool, and high disinfecting chlorine level, as with no CYA in indoor pools, can be a disaster, as a couple of pool users found out when their marine-grade (316L) stainless steel corroded in less than a year.
So I believe the best thing to do is to use CYA in all pools, but to monitor the CYA and FC levels so that the FC/CYA ratio is kept at a target level to keep away algae. For green algae, this minimum is an FC of around 7.5% of the CYA while for yellow/mustard algae the minimum is an FC of around 15% of the CYA. The actual minimum is a function of algae growth rates so nutrient rich pools with lots of phosphates will need to have that minimum more strictly followed or perhaps be even a bit higher while those pools with low-growth conditions won't need as much chlorine to keep away algae. I am currently trying to determine what phosphate/nitrate levels correspond to Ben's chart minimums, but many pool users following that chart and not having algae have at least 1000 ppb phosphates so I'm pretty sure the number is higher than that (one user we know was at 3000 ppb with no problems so it might be that higher-than-chart levels are only needed for really high phosphates such as 5000-10,000 ppb, but I don't know for certain -- yet).