The typical price on the stock market is the result of making an arithmetic mean between the maximum price, the minimum price and the closing price of a financial asset.
Typical price is a widely used calculation in technical indicators. Technical analysis is a type of stock market analysis that is based on the study of prices. 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 is of little use on its own. 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.
Well, it is true, let it be said, that the indicators are usually calculated based on the closing price. Still, technical indicators sometimes perform better using 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 newbies in the field.
The formula for the typical price (PT) is:
In a practical case, suppose we observe the following Japanese candle:
In the previous image we have four data. However, if we look at the formula, we only need three pieces of information. The maximum price, the minimum and the closing. The calculation is as follows:
PT = (high + low + close) / 3 = (3.12 + 2.99 + 3.1) / 3 = $ 3.07
To learn where is the close and open of a Japanese candle, it is advisable to read the article on Japanese candles.
Why is the typical price used?
Typical price is used because it is a less volatile measure. That is, since it is an average of three data, it is more difficult for it 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 the analyst. And more importantly, its detailed analysis. In the stock market there is no fixed rule. Therefore, it is always advisable to research 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 be the case.