A Vortex Indicator (VI) is an advanced tool composed of two lines: an uptrend line (VI+) and a downtrend line (VI-), often colored green and red respectively. This remarkable indicator aids in identifying trend reversals and validating ongoing trends.
Harness the Power of the Vortex Indicator (VI)
Initially developed by Etienne Botes and Douglas Siepman, the vortex indicator was introduced in a 2009 edition of “Technical Analysis of Stocks & Commodities.” This indicator is premised on two fundamental trendlines: VI+ and VI-.
Calculating the Vortex Indicator
Understanding the Vortex Indicator involves a four-part calculation:
- True Range (TR): The greatest of:
- Current high minus current low
- Current high minus previous close
- Current low minus previous close
- Uptrend and Downtrend Movement:
- VM+ = Absolute value of current high minus prior low
- VM- = Absolute value of current low minus prior high
- Parameter Length (n):
- Choose a parameter length (typically between 14 and 30 days)
- Sum the last
nperiod’s true range, VM+ and VM-:- Sum of the last n periods’ true range = SUM TRn
- Sum of the last n periods’ VM+ = SUM VMn+
- Sum of the last n periods’ VM- = SUM VMn−
- Create the Trendlines VI+ and VI-:
- SUM VMn+/SUM TRn = VIn+
- SUM VMn-/SUM TRn = VIn−
- Consistently updating this calculation daily shapes the VI+ and VI- trendlines.
The traditional application using VI- and VI+ crossovers can result in multiple false trade signals in choppy price action. An effective solution is increasing the periods used, like opting for 25 periods instead of 14, to minimize this issue.
Extracting Valuable Insights
The Vortex Indicator is adeptly used with other reversal patterns to validate a reversal signal. It is a feature in most technical analysis software packages. Typically, VI+ and VI- are graphed independently below a candlestick chart, as illustrated in the accompanying diagram.
An uptick or buy signal emerges when VI+ (green line) crosses above VI- (red line) to take the dominant position. Conversely, a downtick or sell signal manifests when VI- (red line) crosses above VI+ (green line), seizing the top spot. Generally, the trendline which assumes the prominent position dictates whether the security is on an uptrend or a downtrend.
Embrace the Vortex Indicator to refine your analysis and empower your trading success.
Related Terms: trend, reversal, candlestick chart, security
References
- Technical Analysis of Stocks & Commodities. “The Vortex Indicator”, Page 1.
