What is the Vortex Indicator - VI
A vortex indicator (VI) is an indicator composed of two lines - an uptrend line (VI+) and a downtrend line (VI-). These lines are typically colored green and red respectively. A vortex indicator is used to spot trend reversals and confirm current trends.
Understanding Vortex Indicator (VI)
The vortex indicator was first developed by Etienne Botes and Douglas Siepman who introduced the concept in the January 2010 edition of “Technical Analysis of Stocks & Commodities.” The vortex indicator is based on two trendlines: VI+ and VI-.
Vortex Indicator Calculations
The calculation for the indicator is divided into four parts.
1. True range (TR) is the greatest of:
Current high minus current low
Current high minus previous close
Current low minus previous close
2. Uptrend and downtrend movement:
VM+ = Absolute value of current high minus prior low
VM- = Absolute value of current low minus prior high
3. Parameter length (n)
Decide on a parameter length (between 14 and 30 days is common)
Sum 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−
4. Create the trendlines VI+ and VI-
SUM VMn+/SUM TRn = VIn+
SUM VMn-/SUM TRn = VIn−
Repeating this process daily forms the VI+ and VI- trendlines.
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.
The vortex indicator is commonly used in conjunction with other reversal trend patterns to help support a reversal signal. It is integrated into most technical analysis software programs. VI+ and VI- are typically graphed independently below a candlestick chart. The chart below provides an example with lines that indicate changing trend signals on a candlestick chart.
An uptrend or buy signal occurs when VI+ is below VI- and then crosses above VI- to take the top position among the trendlines. A downtrend or sell signal occurs when VI- is below VI+ and crosses above VI+ to take the top position among the trendlines. Overall, the trendline in the top position generally dictates whether the security is in an uptrend or downtrend. (See also: Understand Vortex Indicator Trading Strategies)