The typical market price is the result of performing an arithmetic average between the maximum price, the minimum price and the closing price of a financial asset.
The typical price is a calculation that is often used a lot in technical indicators. The technical analysis is a type of market analysis based on the study of contributions. Although it is an unpopular concept among traders and analysts, it is a very important concept.
The importance does not lie in its usefulness. In fact, it alone has little use. Its importance lies in the usefulness it has for calculating other indicators. That is, indicators such as moving averages , keltner bands, RSI or stochastic can be calculated based on the typical price.
It is true, everything is said, that the indicators are calculated, usually, based on the closing price. Still, sometimes, technical indicators offer better results using the typical price.
How the typical price is calculated
Although its calculation is implicit in its own definition, it is always convenient to give an example that allows a better understanding of the concept. Especially for the novice in the matter.
The typical price formula (PT) is:
In a practical case, suppose we look at the following Japanese candle:
In the previous image we have four data. However, if we look at the formula, we only need three data. The maximum, minimum and closing price. The calculation is as follows:
PT = (maximum + minimum + close) / 3 = (3.12 + 2.99 + 3.1) / 3 = $ 3.07
To learn where the closing and opening of a Japanese candle is, it is recommended to read the article on Japanese candles.
Why is the typical price used?
The typical price is used because it is a less volatile measure. That is, being an average of three data, it is more difficult to change. Therefore, the creators of some technical indicators prefer this measure. This allows, on paper, that the indicators do not change abruptly in value.
Its use in other indicators that do not usually use this measure will depend on the experience of the trader and analyst. And more importantly, from his detailed analysis. In the stock market there is no fixed rule. With which it is advisable to always investigate the concept to get the most out of it.
It could happen that a technical indicator that is calculated with closing prices and that after analyzing other measures, works better taking the typical price as a reference. And, of course, the opposite could also happen.