Typical Price

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Introduction

Every trader wants to enter & exit the market at an optimal level. In order to do so, traders use various kinds of Indicators and Strategies. Every Trader wants to predict support and resistance levels because these levels indicate the trend divergence points. Typical Price is commonly used by Traders to determine the support and resistance levels. Typical Price Indicator determines the average figure of High, Low and Closing Prices for previous day. Without the help of Typical Price, one cannot imagine placing stops and taking profits. Each success story indicates a calculated risk. Without risk calculation every move seems like an insane move. Many beginners in the field use their luck or little knowledge to determine the risk associated with a security which may lead to significant loss.

Typical Price is commonly used by Traders in alliance with other Technical Indicators in order to trade in the Forex Market. Typical Price is a key component of Money Flow Index. It can be used anywhere closing price is utilized to determine a trend because Typical Price uses average price for a predetermined period and acts a filter for Moving Average Systems. Typical Price Indicator is preferred by Traders instead of other Closing Price Indicators because Typical Price takes into account High, Low as well as Closing Price during the period. The Moving Average of Typical Price is commonly used by Technical Traders to predict direction of future trends i.e. Downward or Upward.

Floors traders frequently deploy Typical Price in Equity and Futures Exchanges. Reason behind it is that Typical Price uses a single line plot to display average value of Maximum, Minimum and Closing Price of a stock during a specified period. Similar Indicators used by traders include Median Price and Weighted Close. In order to understand the outcome of Typical Price it is important that Typical Price Indicator is calculated over a varying periods. In this way, traders can compare the current average price with the previous ones to see if the market is bullish or bearish. If current Typical Price is above previous Typical Price Calculation then it will be bullish sentiment. On the other hand if Previous Typical Price outcome was greater than current Typical Price then it would be bearish trend prevailing in the market.

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Calculation

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

Specifications

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 bearish.

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 - High
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

  1. 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.
  2. 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.  
  3. The Five Point System used to calculate Typical Price greatly helps in determining the optimal time to enter a market or exit it.

Disadvantages of Typical Price

  1. Typical Price is an incomplete indicator. It requires the help of another technical indicator like MACD or Moving Average to determine future price trends.
  2. Typical Price doesn’t work good while signaling entry points. Traders following Typical Indicator believe that it is good for exit points only.