Whether to Use the Open, High, Low or Close On Trading Indicators
Which price data point is used will affect indicator performance
Technical indicators are mathematical calculations that display the price movements of an asset in a different way (compared to just looking at the price movement itself). Indicators usually have several settings that can be configured by the trader to modify the way the indicators are displayed.
Indicators are drawn based on data points from the price movements of an asset. These data points typically correspond to price bars on the chart. Price bars are composed of an open, a high, a low and a close. Therefore, when using an indicator, the trader can often choose which of these data points the indicator will use in its calculations. Another common setting traders can choose is the average of the open, high, low and close, or OHLC Average. The high, low, close average (HLC Average) is also common in many trading platforms.
Note that in some charting and trading platforms the close price is also referred to as the "last" price. The attached chart shows these options in the settings menu of an indicator. Other options may also be provided, depending on the indicator.
The Average of the Open, High, Low and Close (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. For example, a candlestick or price bar may have an open of 68, a high of 85, a low of 66, and a close of 72.
The calculation of the open, high, low, close average is as follows:
- OHLC Average = (Open + High + Low + Close) / 4
If the price data is plugged into the formula, the result is as follows:
- OHLC Average = (68 + 85 + 66 + 72) / 4 = 72.75
The HLC Average is much the same except the open price is excluded, and the sum of the high, low and close are divided by three.
- HLC Average = (High + Low + Close) / 3
- HLC Average = (85 + 66+ 72) / 3 = 74.33
As can be seen from these two calculations, which result in different numbers, the input data will affect the current reading (calculation) of the indicator.
Choosing the Right Indicator Input Data
The default setting for many indicators is to use the close of the time frame as the input data. Changing this to the open, the high or low can dramatically affect how the indicator moves and the analytical insight it provides. The open, high, low and close average (OHLC average) is the average of all these settings combined.
There is no right or wrong setting for an indicator. Whether to the use the open, high, low or close or an average will depend on the analytical insight the trader requires from the indicator. While using the closing price is the most common setting for indicators, and is valid, there may be situations where using the other data points provides better insight.
For example, during an uptrend, if the trader is watching for price bars dropping below a moving average (MA), then using the low of each candle as the input for the MA may make more sense than using the close. This way, the moving average is only breached when a price bar penetrates the average lows of other price bars. The same concept could be applied during a downtrend, and using price bar highs to calculate the moving average. This isn't a requirement, only an example of how settings can be altered to achieve alternative insight.
While differences are often minor, if an indicator is used to provide trade signals, the input data will have a direct impact on the profitability of those trades signals.
Final Word on Using the Open, High, Low or Close for Technical Indicators
Experiment with different settings for any indicator that you use. Choose the settings that works best for your analysis and trading style. There is no right or wrong, it all depends on how the indicator is being used. In some cases, a trader may want to base their indicator on a closing price, while the OHCL Average may work better for another trader. The high, low and open are also viable.
To experiment with which input data works best for you, place several versions of the same indicator on the same chart. Change the input data for each one, so you can visually see how the input data changes the indicator. If necessary, change the color of these various indicators so you can tell them apart. Select the setting(s) that provides the best insight for the strategy or analysis method you are using.
Updated by Cory Mitchell, January 2017.