The Vortex Indicator is a very useful technical indicator to identify the start of a new trend.
Etienne Botes and Douglas Siepman published this indicator in the Technical Analysis of Stocks & Commodities Magazine.
We usually calculate the Vortex Indicator over 14 periods.
We can use it both on daily time frames and on Intraday time frames (15-30-60 minutes).
The indicator comprises two lines (+VI and -Vi), performing which allows us to determine what is the present trend on the market.
If the +VI is above the -VI, the trend is bullish.
If the -VI is above the +VI, the trend is bearish.
A bullish signal occurs when the +VI crosses the -VI from bottom to top.
A bearish signal occurs when the -VI crosses the +VI from bottom to top.
A bullish divergence occurs when prices draw decreasing lows. The +VI draws increasing lows and -VI draws decreasing highs.
There is a bearish divergence when prices draw rising highs. The +VI draws decreasing highs and -VI draws rising lows.
If the +VI crosses the -VI from bottom to top, thus providing a bullish signal.
Market entry occurs when prices exceed the maximum of the bar where the cross occurred.
Similarly, if the -VI crosses the +VI from bottom to top, thus providing a bearish signal.
Market entry occurs when the prices fall below the bar where the cross occurred.
Crossovers between + VI and -VI often trigger interesting directional moves.
Some analysts, instead of using the two lines, build an indicator calculated as the difference between the +VI and the -VI.
This way you get a single line and when it is above its equilibrium line, it signals a bullish trend.
When it is below its equilibrium line, showing a bearish trend.
It provides a bullish signal when moving above its balance line.
We have a bearish signal when it goes below that line.
It allows identifying interesting positive/negative divergences regarding the price trend.
Other analysts have changed the calculation formula of the Vortex Indicator to include any gaps. Others combine the signals provided by the Vortex with other indicators, which measure the volatility present on the market.
Vortex Indicator Code for TradeStation and MultiCharts
This is the code of the Vortex Indicator for TradeStation and MultiCharts:
Inputs: Length( 14 ) ; variables: VMPlus( 0 ), VMMinus( 0 ), VMPlusSum( 0 ), VMMinusSum( 0 ), TR( 0 ), TRSum( 0 ), VIPlusSumRge( 0 ), VIMinusSumRge( 0 ) ; VMPlus = AbsValue( High – Low ) ; VMMinus = AbsValue( Low – High ) ; VMPlusSum = Summation( VMPlus, Length ) ; VMMinusSum = Summation( VMMinus, Length ) ; TR = TrueRange ; TRSum = Summation( TR, Length ) ; if TRSum <> 0 then begin VIPlusSumRge = VMPlusSum / TRSum ; VIMinusSumRge = VMMinusSum / TRSum ; end ; Plot1( VIPlusSumRge, “VI+Sum/Rge”, Green ) ; Plot2( VIMinusSumRge, “VI-Sum/Rge”, Red ) ;
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External sources: Wikipedia