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Typical Price

Parameters:

There are no adjustable parameters for this indicator.

Style:

  • Customizable options for visual representation (line color, style, etc.)

The Typical Price is a type of technical analysis indicator that provides an average security price over a specific period. It is calculated by taking the sum of the high, low, and closing prices for a given period and dividing it by three. This value serves as a simple moving average representing the price action's central tendency within the specified period. The Typical Price serves as a foundational element for various technical indicators. For instance, it is utilized in the calculation of the Money Flow Index (MFI). Additionally, it plays a key role in determining the Commodity Channel Index (CCI).

How Typical Price Works: The Typical Price aims to smooth out the daily price fluctuations and give a more stable representation of the security's Price. It is particularly useful for identifying potential reversal points and for confirming trends.

Formula for Typical Price:

Typical Price=(High+Low+Close)/3

Here's a breakdown of the components:

  • High: The highest Price at which the security traded during the period.
  • Low: The lowest Price at which the security traded during the period.
  • Close: The closing price of the security at the end of the period.

Key Aspects of Typical Price:

  1. Simplicity: The Typical Price is straightforward to calculate and interpret, making it accessible even to novice traders.
  2. Averaging Effect: By averaging the high, low, and close prices, the Typical Price smooths out the noise and provides a more stable reference point for price action analysis.
  3. The basis for Other Indicators: The Typical Price is often used as an input for more complex indicators like the Money Flow Index (MFI) and the Commodity Channel Index (CCI), which is used to gauge market momentum and trend strength.
  4. Trend Confirmation: It helps in confirming trends. If the Typical Price is moving upward consistently, it indicates an uptrend; if it is moving downward, it suggests a downtrend.

Application of Typical Price: Traders use the Typical Price to confirm trends and identify potential reversal points. Here's how it can be applied in trading strategies:

  • Trend Confirmation: When used in conjunction with other indicators, the Typical Price can confirm the direction of a trend. For instance, if the Typical Price is rising and other trend indicators like moving averages also show an uptrend, it reinforces the strength of the uptrend.
  • Reversal Identification: Sharp changes in the Typical Price can signal potential reversals. For example, if the Typical Price suddenly drops after a consistent uptrend, it might indicate the beginning of a downtrend.
  • Divergence: Divergence between the Typical Price and Relative Strength Index (RSI) or MACD indicators can signal potential trend reversals. This divergence can act as an early warning sign, alerting traders to possible changes in market direction. If the Typical Price is making new highs while the RSI is not, it might suggest weakening momentum.

Example Calculation: Suppose a stock has the following price data for a day:

  • High: $150
  • Low: $145
  • Close: $148

The Typical Price would be calculated as follows:

Typical Price=(150+145+148)/3=443/3=147.67

This value represents the average price level for that day and can be used in further analysis or as input for other indicators.

Limitations:

  • Lagging Indicator: Like all moving averages, the Typical Price is a lagging indicator and may not predict future price movements but rather confirm past trends.
  • Not Standalone: It should not be used in isolation. Instead, it should be employed alongside other technical analysis tools. This combined approach allows traders to make more informed decisions.
  • Limited Information: While it provides a smoothed price, it does not offer insights into the volume or the market sentiment behind the price movements.

Conclusion: The Typical Price is a valuable and simple technical analysis tool providing an average perspective on price movements. Smoothing out daily fluctuations helps traders identify trends and potential reversal points. However, like all technical indicators, it should be used as part of a comprehensive trading strategy with other analyses and indicators to maximize its effectiveness