Typical Price

What is it?

The Typical Price is a simple yet effective technical analysis indicator that calculates the average of the high, low, and closing prices for each period. Instead of using just the closing price to represent a candlestick, Typical Price provides a more balanced view of a security’s price action by incorporating the entire trading range.

The formula is:

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

This indicator is often used as a base for other technical indicators, such as volume-based indicators (like Money Flow Index) or for smoothing into moving averages.

How it works

Typical Price works by assigning equal weight to the high, low, and close prices, giving a central value that reflects the average trading level of a candle. This approach helps reduce noise compared to relying solely on the closing price, which might not always represent the full sentiment of a trading session.

While it doesn’t generate direct buy or sell signals, it serves as a valuable foundation for other calculations, especially when combined with volume or used as a smoother in trend analysis.

How to read it

Reading the Typical Price is straightforward:

• A rising Typical Price over several periods indicates increasing average value, usually signaling bullish momentum.

• A declining Typical Price indicates weakening prices or bearish sentiment.

• When overlaid with price or volume indicators, divergences between Typical Price and price action can provide clues to potential reversals.

Since it’s a calculated average, the Typical Price often lies near the center of the candlestick body and wicks.

Best settings

There are no adjustable “settings” for the Typical Price itself, as it is a straightforward formula. However, traders often use it in conjunction with:

• Moving averages of the Typical Price (e.g., 14-period MA of Typical Price)

• Money Flow Index, which uses Typical Price as part of its calculation

• Custom indicators built upon this averaged value

How to use it in a strategy

Here are some ways traders use the Typical Price in their trading strategies:

1. Trend Confirmation Smoothing the Typical Price with a moving average can help confirm the strength and direction of a trend. When price consistently trades above the moving average of Typical Price, it's often a bullish sign.

2. Volume-Weighted Tools When used with volume-based indicators, Typical Price can highlight buying or selling pressure more accurately than closing prices alone.

3. Baseline for Custom Tools Many algorithmic or custom-built indicators use Typical Price as their input for enhanced sensitivity to market behavior.

Common mistakes

• Using Typical Price as a standalone signal: It’s not a momentum or trend indicator by itself. Without context or supporting tools, it provides limited actionable insight.

• Ignoring the candle structure: Since it averages out highs and lows, relying too heavily on Typical Price may cause traders to overlook significant price wicks or candlestick patterns.

• Assuming precision: Traders sometimes falsely assume Typical Price offers more precision than it actually does. It’s best used in combination with other indicators.

Final thoughts

The Typical Price is a foundational concept in technical analysis. While simple in nature, it plays a critical role in the development of more complex indicators. By incorporating more of the candle’s structure (high, low, and close), it provides a fairer view of market sentiment.

For traders looking to refine their indicator inputs or create custom strategies, the Typical Price offers a reliable starting point — especially when paired with volume or trend tools.