Vortex Indicator - VI
DEFINITION
An oscillator composed of two lines--an uptrend line (VI+) and a downtrend line (VI-). These lines are typically colored red and green respectively. Vortex indicator is used to spot trend reversals and confirm current trends. An uptrend or buy signal occurs when VI+ crosses above VI-. A downtrend or sell signal occurs when VI- crosses above VI+.
The calculation for the indicator is divided into three parts:
1. Uptrend and downtrend movement:
- VM+ = Current high minus prior low
- VM- = Current low minus prior high
- VMx+ = x-period Sum of VM+
- VMx- = x-period Sum of VM-
Where "x" is the number of price bars or periods the indicator will look at (between 14 and 30 is common).
2. True Range (TR) is the greatest of:
- Current high minus current low
- Current high minus previous close (absolute value)
- Current low minus previous close (absolute value)
TRx = x-period Sum of TR
3. Normalize uptrend downtrend movement:
- VIx+ = VMx+/TRx
- VIx- = VMx-/TRx
EXPLANATION
Developed by Etienne Botes and Douglas Siepman, the traditional application of using VI- and VI+ crossovers can result in a number of false trade signals when price action is choppy. Increase the number of periods used in the indicator to reduce this, for example, using 25 periods instead of 14.
Another approach is to wait for the indicator to cross a key level following a VI-/VI+ crossover. When VI+ crosses above VI-, only take a long trade once VI- crosses below 0.9 and VI+ crosses above 1.10. When VI- crosses above VI+, only take a short trade (or exit longs) once VI+ crosses below 0.9 and VI- crosses above 1.10.
When VI+ is above VI- it confirms a price uptrend, and when VI- is above VI+ it confirms a price downtrend.