Vortex Indicator
Definition
The Vortex Indicator consists of two lines that signify uptrend (VI+), commonly depicted as green, and downtrend (VI-), commonly depicted as red. This indicator is specifically used to determine trend reversals and confirm current trends and direction.
History
Developed by both Etienne Botes and Douglas Siepman, the Vortex Indicator was first introduced in the January 2020 edition of the “Technical Analysis of Stocks & Commodities” magazine.
Calculations
The Vortex Indicator has four main parts for its calculation. We go through these sections in depth a bit more below.
True range (TR) is the greatest of the following:
- Current high - current low
- Current high - previous close
- Current low - previous close
Uptrend and downtrend movement can be determined with the following trendlines calculations. It is also worth noting that they are usually displayed below a candlestick chart.
- VM+ = absolute value of current high - prior low
- VM- = absolute value of current low - prior high
Parameter length (n) is a result of trader preference. Traders commonly select parameters between 14 and 30 days. The calculations for parameter length are as follows:
- Sum of the last n period’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-
Creating the VI+ and VI- trendlines. Lastly, traders will need to use the following formulas to calculate the two trendlines of the Vortex Indicator. By repeating this process daily, the trendlines will form.
- VIn+ = SUM VMn+ / SUM TRn
- VIn- = SUM VMn- / SUM TRn
Takeaways and what to look for
The Vortex Indicator is best used with other indicators, tools, and reversal trend patterns that help support a reversal signal.
Uptrends, or buy signals, occur when the VI+ line is below the VI- line and then crosses above the VI- to be the top trendline.
Downtrends, or sell signals, occur when the VI- line is below the VI+ line and then crosses above the VI+ to be the top trendline.
It is a general rule that whichever trendline is on top usually is the one which dictates a security’s position (being either in uptrend or downtrend).
Limitations
Traders should be mindful when using the Vortex Indicator because VI+ and VI- crossovers can, at times, cause for a number of false trade signals to trigger. This is especially the case when price action is choppy and is not countered with smoothing indicators or tools. To remedy this, many traders have found it helpful to adjust the periods used in order to reduce the number of false signals being fired. If this is the case for you, try modifying your indicator settings and adjust the period to see if that gets you a better result.
Summary
The Vortex Indicator is based on two trendlines, VI+ and VI-, which signify uptrend and downtrend within the current market, respectively. This indicator can help determine trend reversals and confirm current trends and direction, highlighted in the position of the trendlines in relation to each other.