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 open, high, low, and close.
The Average of the Open, High, Low, and Close, or the OHLC Average
The average of the open, high, low, and close (sometimes known as the OHLC average), is the average value of the opening price for the time frame, the highest price that was reached during the time frame, the lowest price that was reached during the time frame, and the closing price for the time frame (e.g. a ten minute candlestick might have an open of 68, a high of 85, a low of 66, and a close of 72).
The calculation of the average of the open, high, low, and close, is as follows:
- OHLC Average = (Open + High + Low + Close) / 4
For example, if a ten minute candlestick has an open of 68, a high of 85, a low of 66, and a close of 72, then the average of the open, high, low, and close, would be calculated as follows:
- OHLC Average = (68 + 85 + 66 + 72) / 4 = 73
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 open, high, low, and close as the input data, can display the indicator quite differently from the default settings.
The average of the open, high, low, and close, is an open and close weighted average of the entire time frame, and therefore includes all of the trading information for the time frame, with additional importance placed upon the initial and most recent trading information (i.e. the first price and the last price of the time frame).
Either the close of the time frame, or the average of the open, high, low, and close, 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.