What is the Vortex Indicator (VI)?
Let me tell you about the Vortex Indicator, or VI for short. It's made up of two lines: an uptrend line called VI+ and a downtrend line called VI-. These are usually shown in green and red. You use this indicator to spot when trends are reversing or to confirm the trends that are already in place.
Understanding Vortex Indicator (VI)
The Vortex Indicator was first put together by Etienne Botes and Douglas Siepman. They introduced it in the 2009 edition of 'Technical Analysis of Stocks & Commodities.' At its core, it's based on those two trendlines: VI+ and VI-.
Vortex Indicator Calculations
Calculating the Vortex Indicator breaks down into four parts. First, you figure out the true range, or TR, which is the greatest of the current high minus current low, current high minus previous close, or current low minus previous close.
Next, you calculate the uptrend and downtrend movements. VM+ is the absolute value of the current high minus the prior low, and VM- is the absolute value of the current low minus the prior high.
Then, you pick a parameter length, n—something between 14 and 30 days is common. Sum up the last n periods' true range as SUM TRn, the last n periods' VM+ as SUM VMn+, and the last n periods' VM- as SUM VMn-.
Finally, create the trendlines: VIn+ is SUM VMn+ divided by SUM TRn, and VIn- is SUM VMn- divided by SUM TRn. You repeat this daily to build the VI+ and VI- lines.
Using VI- and VI+ crossovers the traditional way can give you false signals in choppy price action. To cut down on that, increase the periods—say, from 14 to 25.
Inferences
You often use the Vortex Indicator alongside other reversal patterns to back up a signal. It's built into most technical analysis software. VI+ and VI- get plotted separately below a candlestick chart. There's an example chart that shows lines marking trend changes on candlesticks—imagine one where the lines cross to indicate shifts.
A buy signal or uptrend happens when VI+ is below VI- and then crosses above it to take the top spot. A sell signal or downtrend is when VI- is below VI+ and crosses above to the top. In general, whichever line is on top tells you if it's an uptrend or downtrend.
