The Formula to calculate Typical is very easy and simple. Typical Indicator uses
three figures i.e. High Price, Low Price and Closing Price. All of these are added
up and the outcome is divided by 3. The outcome is an average of the key components
of every day’s price movements.
Another common technique used to calculate Typical Price includes Current Opening
Price in the Numerator as well.
Typical Price = (High + Low + Close + Opening) / 4
In order to use the five-point system effectively, it is important that we differentiate
typical price from support and resistance. Typical Price acts as the primary source
of support or resistance. The other support and resistance levels calculated are
of less importance and acts as secondary indicators of price movements. It is important
to remind traders that Typical Price acts as a short term price predictor. It cannot
be used in the long run for determining price movements. In order to use Typical
Price effectively, determine the market trend first. Afterwards, if the Typical
Price is depicting an upward movement, then the market would be bullish. Similarly,
if the Typical Price is illustrating a downward trend, then the market would be
Support and Resistance Levels are critical points in any trading market. Their outcome/reaction
may vary depending on the approach of price in an uptrend or downtrend market. There
are three frequently used indicators within Typical Price for price movements. In
order to calculate these three levels, a past price movement is added to the Typical
Price to determine Resistance Level and deducted to determine the Support Levels.
The First Level of Support (S1) and Resistance (R1) are calculated by using high
and low of previous trading period.
- R1 = TP + (TP - Low) = 2×TP - Low
- S1 = TP - (High - TP) = 2×TP
Hence, First Level of Resistance can be obtained by multiplying Previous Typical
Price by 2 and subtracting Low Price. Similarly, First Level of Support can be obtained
by multiplying Typical Price by 2 and subtracting High Price. The Second Level of
Resistance and Support can be calculated as under:
- R2 = (TP – S1) + R1
- S2 = TP – (R1 – S1)
A third set of Resistance and Support, above and below second level of Resistance
and Support are calculated by traders in the following way.
- R3 = (TP – S2) + R2
- S3 = TP – (R2 – S2)
Typical Price is used by Traders to fulfill two major roles i.e. determining price
movements and calculating accurate time to enter and exit the market optimally.
Enter and Exit can be done by placing limit or stop orders. However, Typical
Price can only be used effectively if a technical indicator is used at the same
time to like MACD or a Candlestick Patterns.
Advantages of Typical Price
- Typical Price can be used by any kind of trader e.g. Day Trader can determine Typical
Price for each day. Similarly, Swing Trader can use Typical Price to determine price
movements of each week.
- Until and unless a price breakout occurs, price trends
invariably follow Typical Price Indicator. Typical Price can indicate New Top or
Bottom in the market as well.
- The Five Point System used to calculate
Typical Price greatly helps in determining the optimal time to enter a market or
Disadvantages of Typical Price
- Typical Price is an incomplete indicator. It requires the help of another technical
indicator like MACD or Moving Average to determine future price trends.
Price doesn’t work good while signaling entry points. Traders following Typical
Indicator believe that it is good for exit points only.