Summary:
- The Average Price indicator measures the average daily price for an asset by totaling the high, low, and closing prices and dividing these by three to get an average price.
- This helps to inform traders if a current price is trading higher or lower than the average daily price. Traders can buy when the price is below the daily average and sell when the price is above the daily average, using a crossover EMA strategy to confirm buy & sell signals.
- As a short-term indicator, it is suitable for short-term leverage trading and automated bot trading.
What Is The Average Price (also known as Typical Price) Indicator?
The average price indicator measures the daily average of an asset’s price based on high, low, and closing prices. Traders mostly use it for short-term leverage trading and automated bot trading by buying below the average price and selling above the average price.
The average price indicator is a line that oscillates directly over the chart candles. The indicator formula can be calculated easily.
If we’re trading Bitcoin (BTC) and the high for the day is $36,000 while the low for the day is $34,000 and the closing price is $35,000, the indicator line will result in $35,000. The line oscillates as the price trends unfold and can give us signals about when Bitcoin is trading below the average range or above the range. On short-term charts such as 1H (hourly) or 15M (minute), this can give us insight into a coin’s support and resistance levels.
It can also be used for crossover trading when it crosses the Exponential Moving Average (EMA). It should not be used in isolation, as the data it provides lacks context about volume and overbought/oversold levels. It says little about the direction of a price trend, as it does not account for advance metrics such as volume profile, buying force, and historic trends.
The average price indicator inspired the Money Flow Index (MFI) and the Commodity Channel Index (CCI) and is used as a component in these calculations. Traders should only use it to reaffirm their trading bias about a long or a short trade, basing their opinion on where the average price line is in relation to the price.
What Is The Average Price Formula?
The average price formula is a result of the average high, average low, and closing price combined and divided by three. The exact formula is the following:
The indicator was originally developed for the stock markets in which the closing price is the price at 5 pm when the market closes. In the crypto market, the “closing price” is a price taken at 00:00 UTC because crypto trading goes on 24/7.
We can easily calculate this formula manually by measuring the current averages for Bitcoin and Ethereum (ETH):
- Bitcoin: High: $36,000. Low: $34,000. Closing: $35,000. Combined we get 105,000 and once we divide it by 3, the result is $35,000.
- Ethereum: High: $3,000. Low: $2,600. Closing: $2,700. Combined we get 8,300 and once we divide it by 3, the result is $2,760.
The average price line will cut through the middle of the high and low average. However, the current price candles may be trending below or above this line which makes it useful for trading. The formula is only calculated for daily averages and doesn’t use periods.
For example, indicators such as the Exponential Moving Average (EMA) use 9 periods which means the average is calculated based on averages for the past 9 days. The average price indicator only calculates averages for the current day.
How to Use the Average Price Indicator?
Click on Markets on the Phemex platform and pick any of the trading pairs such as BTC/USDT to get started.
Next, click on “Indicators” at the top, and then click on “Typical Price” (another name for “Average Price”) from the drop-down. The indicator will appear in the search bar:
The TP indicator will appear as a red line on the Bitcoin chart:
We’re now using the indicator on the 1D (daily) chart for which it was developed. Change the settings by hovering over the indicator in the top-left to make it more visible. We’ll pick a yellow color that is more reflective against the dark background:
The color automatically changed and we can see how Bitcoin traded above or below the average price at different intervals.
Now that we’re ready, we can move on to trading strategies with the indicator.
How to Trade With the Average Price Indicator?
The Average Price indicator is best used in combination with moving average (MA) indicators for crossover trading. In a crossover trading strategy, we wait for two lines to meet each other on the chart before opening a trade. It is often combined with the Exponential Moving Average (EMA).
The EMA is a weighted trend indicator that places weight on recent price data over 9 periods. Depending on where the Bitcoin price is in relation to the EMA, we can determine if we’re in a bullish or bearish trend.
It’s possible to activate both indicators on the chart (using the above example) and use it to place trades strategically. Here’s how both indicators look on the chart:
If the TP line (yellow) meets the EMA line (blue) and goes above or below it, we have a so-called “cross”. Once the two lines diverge from each other, this is when we place our trade. We can see how that reflected in the latest Bitcoin trends:
In the first example, the TP line crossed the EMA line and went above it. This was followed by a steep price increase from $39,000 up to $49,000 over the span of two weeks. Usually, when the Bitcoin candles go above the EMA line this indicates a bullish trend and we can open a long trade. Conversely, when the EMA line is trading above the Bitcoin candles this indicates a bearish trend and we can consider opening a short trade.
The TP indicator can give us the “Buy” signal or the “Sell” signal once these two lines cross and diverge. In the first encircled example, the yellow line crosses above the blue line – this is our buy signal.
In the second example the opposite happens and the yellow line crosses under the blue line – this is our sell signal.
How To Make The Average Price Indicator More Effective?
To conduct further technical analysis, we can combine the Typical Price indicator with the Volume Weighted Average Price (VWAP) indicator. This would give us further context about how volume affects the average price:
The VWAP indicator is the dark blue line in this example. Traders use the VWAP to buy when the price is trading below the line and sell when it’s trading above the line. If we want to make a buying decision based on when the price is trading below the TP line, we can use the VWAP to confirm that the price is also trading below the average there. We can also sell when the price goes above the line.
In the example above, we can see an initial breakdown in price when the price goes below the VWAP line – this presents a buying opportunity. Once the price goes above the VWAP line, we can sell at a higher price and close the trade.
Conclusion
The purchase price of crypto fluctuates daily and crypto markets are the most volatile in the world–we frequently see prices surging or crashing by more than 10% in a day. Purchasing Bitcoin at the right time within a certain day can make a significant difference to trading profits, and the Average Price/Typical Price indicator tells us when we should buy–by waiting for the price to dip below the daily averages.
At the same time, traders should be cautious as this is an incomplete indicator for day trading, and should combine it with other indicators such as Moving Averages or the VWAP indicator that weighs in on volume in relation to price. This will give a complete picture about the current average price in relation to other metrics.
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