A typical price is an indicator used in the technical analysis of financial markets. Typical price is created by adding the high, low and closing prices for the specified period and dividing the total by three. This value can be charted and used in the formation of other indicators and systems.
Technical analysis charting programs produce price charts in various formats. The most popular of these are bar charts and candlestick charts. Both styles produce a high price, a low price and a closing price for the selected period of time. The opening price can also be used.
The period of time for each bar can be any time period available on the software program. Some popular time periods are 15 minutes, one hour and daily. Many charting programs offer periods of one second to one year. This feature allows the trader to view a graphical representation of the price action in a very short or very long time frame — or anywhere in between.
Another type of chart is the line chart. This type of chart draws a line using the same variable from each bar. The most common line chart uses the closing price from each bar to draw the line. The typical price can also be used to draw the line chart.
A typical price is more or less an average of all prices on the bar, with an emphasis on the closing price. If the closing price graph is drawn in comparison with the typical price graph, clues about future price action might be revealed. The typical price might be a more accurate indicator of the actual prices paid for a financial instrument over a given period of time.
Various indicators and trading systems use the typical price as the foundation of system development. The money flow index and the commodity channel index are two indicators based on the typical price. The value of this indicator is evident in the number of traders using these systems and the number of charting programs that make it available.
Typical price line charts can also be used as a form of moving average when compared to the bar or candlestick chart. This type of indicator can be developed into a trading system. Trade entry and exit signals could be created by means of bounces and crossovers.
A money flow indicator is simply typical price times volume. This popular indicator provides a realistic view of the amount of volume supplied to move the price. The commodity channel index formula is much more complicated. This indicator signals extreme market conditions and possible market reversals. Both indicators are widely used.
Related price averages of the typical price are the median price and the weighted close. The median price is the high plus the low, divided by two. This average does not give the closing price additional weight. The weighted close indicator gives the closing price a great deal of importance. The formula is high plus low, plus two times the closing price, all divided by four.