Vortex Indicator (VI)

Written by True Tamplin, BSc, CEPF®

Reviewed by Subject Matter Experts

Updated on July 24, 2023

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What Is Vortex Indicator (VI)?

The Vortex Indicator (VI) is an algorithmic tool used to detect trend reversals in securities pricing.

Developed by Etienne Botes and Douglas Siepman in 2009, it bases the formation and direction of current trends on previous periods' highs, lows, and closing prices.

The VI's results are represented as an oscillator, with intersecting lines indicating bullish or bearish market trends.

The indicator's concept, inspired by the natural vortex behaviors observed in water flow and predator-prey relationships, parallels dynamic market actions and trend reversals.

In trading, the VI aids in pinpointing the onset and conclusion of market trends, providing key insights for technical analysts and traders.

It offers an understanding of market volatility and the strength of price movements, and assists in determining trade entry and exit points, thus potentially improving decision-making efficiency and profitability.

Concept and Calculation of the VI

Formula of the VI

The process of computing the Vortex Indicator is partitioned into four stages.

Determining the True Range (TR)

  • Maximum of the current day's high less the day's low.

  • Maximum of the current day's high less the previous day's closing. The current day's low less than the previous day's closing.

Identifying the Upward And Downward Motion:

  • VM+ is the absolute difference between the current high and the previous low.

  • VM- is the absolute difference between the current low and the previous high.

Setting a Parameter Length (n)

  • Choose a parameter length (typically between 14 and 30 days)

  • Calculate the cumulative total of the last n period's true range, VM+, and VM-:

  • Total of the last n period's true range = SUM TRn

  • Total of the last n period's VM+ = SUM VMn+

  • Total of the last n period's VM- = SUM VMn−

Drawing the Trendlines Vi+ And Vi-

  • SUM VMn+/SUM TRn = VIn+

  • SUM VMn-/SUM TRn = VIn−

  • This calculation is repeated daily to establish the VI+ and VI- trendlines.

  • The conventional method of using VI- and VI+ intersections can generate multiple erroneous trading signals when the price fluctuates significantly.

  • To minimize this, increase the number of periods used in the indicator, for example, by using 25 periods instead of 14.

Understanding the Positive and Negative Vortex Indicators (VI+ and VI-)

Role of VI+ and VI- in Identifying Price Movements

The Positive Vortex Indicator (VI+) and the Negative Vortex Indicator (VI-) are essential tools used to indicate price movements in trading.

In essence, the VI+ is indicative of an upward price movement, thus signaling the potential for profit. On the other hand, the VI- represents a downward price movement, which suggests a fall in the value of the asset or stock.

Significance of VI+ and VI- Crossovers

A crucial aspect of using these indicators is understanding the implications of the crossovers between the VI+ and the VI-.

When the VI+ line crosses above the VI- line, this generally signifies a bullish trend, indicating an upward price trend that could present a good opportunity for buying.

However, the crossing of the VI- line above the VI+ line signals a bearish trend, a downward price trend, which could potentially be an ideal time to sell.

Calculative Components of the VI

Understanding True Range and Its Role in VI Calculation

The calculation of the Vortex Indicator heavily leans on the concept of the True Range. This is a metric that measures the price range during a specific period while also taking into account the previous close.

By providing an understanding of the price volatility, the True Range can help traders anticipate potential price movements.

Defining Vortex Movement and Its Influence on VI

Alongside the True Range, the Vortex Movement is another essential component of the VI calculation. It denotes the distance between the low and high prices of the current and previous period.

This particular distance is then used to calculate both the Positive and Negative Vortex Movements, each contributing significantly to the overall calculation of the Vortex Indicator.

Interpretation of the VI Results

Deciphering Bullish and Bearish Trends

The results of the VI calculation play a vital role in strategic trading decisions. A crucial part of this is understanding the implications of the VI+ and VI- crossovers.

As previously stated, when the VI+ line crosses above the VI- line, it suggests a bullish trend, while a crossing of the VI- line above the VI+ line implies a bearish trend.

Using VI Crossovers as Trading Signals

These crossovers are typically used by traders as buy and sell signals. A bullish crossover (VI+ above VI-) may be seen as a signal to buy, whereas a bearish crossover (VI- above VI+) might be interpreted as a cue to sell.

Potential Trend Reversals and VI Divergence

In addition to identifying trends, the Vortex Indicator can also provide clues about potential trend reversals. This can happen when there is a divergence between the Vortex Indicator and the price.

Such divergences often precede trend reversals, and recognizing these can help traders to better position their trading strategies.

Interpretation of the Vortex Indicator (VI) Results

Significance of the VI in Trading

Use of the VI in Identifying Start of Trends

When VI+ crosses above VI-, it is a signal of a potential beginning of an upward trend. Similarly, when VI- crosses above VI+, it may suggest the start of a downward trend.

Traders use this crossover information to anticipate the emergence of new trends and adjust their trading strategies accordingly.

Use of the VI in Identifying End of Trends

A crossover in the opposite direction may indicate the end of a trend. For instance, if VI+ crosses above VI- during a downward trend, it could signal the end of the bearish trend and the start of a bullish one.

Likewise, if VI- crosses above VI+ during an upward trend, it could signal the end of the bullish trend and the start of a bearish one.

The figure below shows the historical data of the NASDAQ Composite Index between June 2008 and November 2009 is displayed in the form of curves.

The black curve represents a 10-day exponential moving average, while the blue curve represents a 20-day exponential moving average.

Buy signals are indicated by upward arrows, while sell signals are represented by downward arrows. These moving averages were calculated using MATLAB.

Using the Vortex Indicator in Identifying Start and End of Trends

Using the VI to Determine Market Volatility

The Vortex Indicator also provides information about market volatility. The wider the gap between the VI+ and VI- lines, the higher the market volatility, as it shows greater price movement.

Traders use this information to anticipate changes in price and make informed decisions.

Significance of the Vortex Indicator (VI) in Trading

Comparing the VI to Other Technical Indicators

Comparison of VI With Relative Strength Index (RSI)

While both the Vortex Indicator and Relative Strength Index (RSI) are momentum oscillators, their use varies significantly.

The VI identifies the start and end of trends and provides insight into market volatility. In contrast, the RSI measures the speed and change of price movements, and it is typically used to identify overbought or oversold conditions.

Comparison of VI With Moving Average Convergence Divergence (MACD)

The Vortex Indicator and Moving Average Convergence Divergence (MACD) both offer trend-following momentum indicators, but they operate differently.

While the VI focuses on the relationship between high and low prices, the MACD focuses on the relationship between two moving averages of a security's price.

MACD is typically used to identify buy and sell signals, while the VI is used for spotting trend reversals and understanding volatility.

Comparison of VI With Bollinger Bands

Bollinger Bands and the Vortex Indicator also offer different insights. While the VI tracks the start and end of trends, Bollinger Bands measure a security's volatility.

Bollinger Bands consist of a middle band with two outer bands and can help identify whether a security's price is high or low. The VI, on the other hand, provides signals of bullish or bearish trends.

Comparing the Vortex Indicator (VI) to Other Technical Indicators

Strengths of the VI

Identification of New Trends

One of the significant strengths of the Vortex Indicator is its efficiency in identifying new trends. It calculates the positive and negative vortex movements over a period to provide an early indication of a potential trend reversal.

Whether a market is shifting from a bullish to a bearish trend, or vice versa, the Vortex Indicator gives a clear crossover signal, making it a crucial tool for traders looking to capitalize on new trends.

Clear Buy and Sell Signals

Another advantage of the Vortex Indicator is its ability to provide clear buy and sell signals. When the VI+ line crosses above the VI- line, it could be interpreted as a buying opportunity, indicating an upcoming bullish trend.

Conversely, when the VI- crosses above the VI+, it may be a signal to sell, hinting at an incoming bearish trend.

This clarity of signals is advantageous for both novice and seasoned traders as it simplifies the decision-making process.

Versatility Across Market Conditions

The Vortex Indicator is also versatile and can be effective across various market conditions.

Whether in a volatile market with significant price changes or a more stable market with minimal price movement, the VI can provide valuable insights to help traders navigate the market and make informed trading decisions.

Limitations of the VI

Risk of False Signals

Despite its many strengths, the Vortex Indicator, like any technical indicator, is not without its limitations. One such limitation is the risk of generating false signals, particularly in range-bound or sideways markets.

Since the VI calculates positive and negative vortex movements based on the high and low price points, it may not accurately predict trend direction in a market where prices are largely unchanged. This could potentially lead traders to make ill-advised trading decisions.

Lack of Information on Trend Duration and Strength

Another limitation of the Vortex Indicator is that while it can help identify the start and end of trends, it does not provide information about the duration or strength of these trends.

This lack of predictive power regarding how long a trend might last or how strong it might be can leave traders unsure of when to exit a trade or how much to invest.

As a result, traders may need to supplement their use of the Vortex Indicator with other technical indicators or analysis methods that can provide this information.

Strengths and Limitations of the Vortex Indicator (VI)

Strategies for Using the VI in Trading

Basic VI Trading Strategy

The most basic strategy using the Vortex Indicator involves trading on crossovers. When the VI+ line crosses above the VI- line, a trader might take this as a signal to buy.

When the VI- line crosses above the VI+ line, it could be a sign to sell. This strategy can be effective, particularly in markets with strong trends.

Advanced Strategies Using the VI Along With Other Technical Indicators

For more advanced trading strategies, the Vortex Indicator can be used in combination with other technical indicators.

For instance, a trader might use the Relative Strength Index (RSI) or the Moving Average Convergence Divergence (MACD) to confirm signals provided by the VI.

Alternatively, Bollinger Bands could be used in conjunction with the VI to provide additional insight into volatility and potential price reversals.

How to Implement the VI on Trading Platforms

Using the VI on MetaTrader

In MetaTrader, traders can add the Vortex Indicator to their chart by clicking on "Insert," then "Indicators," then "Custom," and finally selecting "Vortex Indicator." The VI will then be applied to the price chart, providing the trader with the VI+ and VI- lines to aid in their analysis.

Using the VI on TradingView

On TradingView, the VI can be added by clicking on the "Indicators" button at the top of the screen and then typing "Vortex Indicator" into the search box. After selecting it, the VI lines will appear on the price chart.

Using the VI on Other Platforms

On most other trading platforms, adding the Vortex Indicator involves a similar process. Traders usually need to navigate to the indicators menu and search for the VI. However, the exact steps can vary, so traders should consult their platform's help or user guide for precise instructions.

Final Thoughts

The Vortex Indicator (VI) is a crucial technical analysis tool that provides insights into the trend direction of a market. It is calculated based on the high, low, and close prices over a specific period.

The VI's significance lies in its ability to identify the beginning and end of trends, providing clear buy and sell signals to traders.

Traders can develop strategies based on these signals, taking advantage of the VI's strengths while being mindful of its limitations, such as the risk of false signals and lack of information about trend duration and strength.

Despite these limitations, the Vortex Indicator remains a powerful tool for understanding market trends. If you're looking to take your trading to the next level, consider seeking professional wealth management services to help you leverage tools like the VI effectively.

Vortex Indicator (VI) FAQs

About the Author

True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website, view his author profile on Amazon, or check out his speaker profile on the CFA Institute website.

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