Technical indicators (e.g. moving averages) are mathematical calculations that are used on graphical charts, to display a market's trading information (e.g. the recent price movement) in a different manner. Indicators usually have several settings that can be configured by the trader to modify the way that the indicators are displayed (e.g. the number of candlesticks that are used in the indicator's calculation, etc.). One of the available, but least often modified settings, is the indicator's input data, for which there are usually several choices, one of which is often the average of the high and low.
The Average of the High and Low, or the HL Average
The average of the high and low (sometimes known as the HL average), is the average value of the highest price that was reached during the time frame, and the lowest price that was reached during the time frame (e.g. a ten minute candlestick might have a high of 85 and a low of 66).
The calculation of the average of the high and low, is as follows:
- HL Average = (High + Low) / 2
For example, if a ten minute candlestick has a high of 85 and a low of 66, then the average of the high and low would be calculated as follows:
- HL Average = (85 + 66) / 2 = 76
Indicator Input Data
The default settings for many indicators use the close of the time frame as the input data, but using the average of the high and low as the input data, can display the indicator quite differently from the default settings.
The average of the high and low is the average of the entire time frame, and therefore includes all of the trading information for the time frame.
Either the close of the time frame, or the average of the high and low, of the time frame, can be used as an indicator's input data (i.e. both are equally correct), but it is useful to know the difference, because it can explain why two seemingly identical indicators are being displayed differently.