Typical Price¶

Definition¶

The Typical Price (TP) indicator provides the average of high, low and close prices for each period. It offers a single value that reflects the general price level, smoothing out short-term fluctuations. Commonly used in combination with other indicators like the Simple Moving Average (SMA) or the Money Flow Index (MFI), the TP helps identify trends or pivot points by simplifying raw price movements.

MobileDesktop

History¶

The TP indicator emerged as a straightforward tool in technical analysis, gaining traction in the 1980s alongside the development of volume-based indicators. Traders sought to create a simple metric that averaged key price levels, making it easier to gauge market behaviour. Its simplicity and utility made it a foundation for more complex indicators.

Calculations¶

The TP indicator calculates the average of the high, low and close prices for each period:

\[ TypicalPrice = { { High + Low + Close } \over 3 } \]

\(High\) – the highest price of the period

\(Low\) – the lowest price of the period

\(Close\) – the closing price of the period

Interpretation¶

• Crossovers – when the Typical Price crosses above a moving average (such as the SMA), it may suggest a potential buying opportunity. Conversely, crossing below a moving average could signal a selling opportunity.

• Rising and falling – a rising TP indicates increasing average price levels, suggesting bullish market sentiment. Conversely, a falling TP signals decreasing average price levels, indicating bearish sentiment.

• Divergence and convergence – divergence between the TP and the price action may suggest potential trend reversals. For example, if the TP is rising while the symbol price is falling, it could signal weakening momentum.

• Reversal points – a sudden shift in the TP direction can indicate potential reversal points in the market, especially when combined with other indicators.

Application¶

• Buy signal – the Typical Price crossing above a predefined moving average (like the 14-period Simple Moving Average) can be interpreted as an opportunity to enter a long position.

• Sell signal – the Typical Price crossing below a moving average can be interpreted as an opportunity to enter a short position.

• Stop-loss placement – traders can place a stop loss below recent swing lows when entering a buy position or above recent swing highs when entering a sell position.

• Exit strategies – traders may consider exiting a position when the TP crosses back below the moving average in a buy scenario or above the moving average in a sell scenario.

• Confirming trades – the TP indicator can be effectively combined with the MFI, MACD or SMA indicators to confirm trade signals. For instance, when the Typical Price crosses above the SMA, it may signal a potential buy opportunity, especially if accompanied by increasing volume or positive market sentiment.

Limitations¶

The Typical Price indicator, while useful, does not account for volatility, which can lead to false signals during choppy market conditions. Additionally, the TP may lag behind price movements, causing delays in signal generation. Relying solely on the TP without confirmation from other indicators can increase risk.

Summary¶

The Typical Price indicator is a valuable tool in technical analysis that calculates the average of high, low and close prices for each period. It provides a simplified view of market trends, helping traders identify potential entry and exit points. The TP is particularly useful for gauging market sentiment and spotting trends. Its ease of interpretation makes it accessible for both novice and experienced traders looking to enhance their trading strategies.