Vortex Indicator

A comprehensive guide to understanding and using the Vortex Indicator in trading.

Introduction

The Vortex Indicator (VI) is a technical analysis tool designed to identify the start of a new trend or the continuation of an existing trend in financial markets. Developed by Etienne Botes and Douglas Siepman, it was first introduced in the January 2010 edition of Technical Analysis of Stocks & Commodities. The indicator draws inspiration from the natural flow patterns observed in water by Viktor Schauberger and the directional movement concepts by J. Welles Wilder.

The Vortex Indicator consists of two lines: VI+ (positive trend) and VI- (negative trend), which help traders gauge the strength and direction of market trends. Unlike some indicators, the Vortex Indicator always provides a clear bullish or bearish bias, as it does not have a neutral setting.

Calculation

The calculation of the Vortex Indicator involves the following steps:

1. True Range (TR): For each period, calculate the True Range as the greatest of:
   • Current high minus current low
   • Absolute value of current high minus previous close
   • Absolute value of current low minus previous close
2. Vortex Movement Up (VM+): VM+ = |current high – previous low|
3. Vortex Movement Down (VM-): VM- = |current low – previous high|
4. Choose a parameter length, n (commonly 14 periods).
5. Calculate the sum of TR, VM+, and VM- over the last n periods.
6. VI+: (Sum of VM+ over n) / (Sum of TR over n)
7. VI-: (Sum of VM- over n) / (Sum of TR over n)

These VI+ and VI- values are then plotted as two lines on a chart. The indicator is volatility-adjusted because it incorporates the True Range, making it suitable for various market conditions.

Examples

On a typical chart, the VI+ and VI- lines are displayed below the price chart. Traders look for crossovers between these lines to generate trading signals:

• Bullish Signal: When VI+ crosses above VI-, it suggests the beginning of an uptrend.
• Bearish Signal: When VI- crosses above VI+, it suggests the beginning of a downtrend.

The distance between the two lines can indicate the strength of the trend, with a wider gap suggesting a stronger trend.

Example Chart: Below is a placeholder for a chart showing VI+ (green) and VI- (red) lines with crossover signals. In practice, you can insert an image from a financial platform like TradingView or Investopedia.

For instance, if VI+ crosses above VI- after a period where VI- was above VI+, this would be a buy signal, indicating a potential uptrend. Conversely, if VI- crosses above VI+, it would be a sell signal, indicating a potential downtrend.

Use Cases

Traders use the Vortex Indicator for various purposes, including:

• Trend Identification: To determine whether the market is in an uptrend or downtrend.
• Trade Signals: Using crossovers to generate buy and sell signals.
• Confirmation Tool: Often combined with other indicators like moving averages, MACD, or the ADX to confirm trends and reduce false signals.
• Volatility Adjustment: Since it incorporates the True Range, it adjusts for market volatility, making it versatile across different market conditions.

For example, a trader might use the Vortex Indicator alongside the MACD to confirm both the direction and strength of a trend before entering a trade. Additionally, increasing the parameter length (e.g., from 14 to 25 periods) can help reduce false signals in choppy markets.