The Vortex Indicator is an oscillator that is used to determine the beginning of a new trend or to confirm an ongoing trend, its direction and strength. It consists of two lines that capture positive and negative trend movement. Those lines are called the uptrend line (VI+) and downtrend line (VI-).
The essence of the vortex pattern lays in connecting the highest and lowest points of the market’s price bars or candles. The principle of the indicator is quite simple — the bigger the distance is between the low of a price bar and the following bar’s high, the greater the upward movement is. The same way, the bigger the distance between a bar’s high and the following bar’s low, the greater the downward movement is.
The Vortex indicator was developed by Etienne Botes and Douglas Siepman, who were inspired by the work of an Austrian inventor, Viktor Schauberger. The latter based his ideas and discoveries on the phenomena that he observed in nature. He examined the flow of water, and, following the idea, the creators of the indicator suggested that the movements within financial markets may resemble the vortex motions in the flow of water. Additionally, the concept of directional movement was taken into consideration, adding true range into the calculation of the indicator.
How to set up
This new to our platform indicator falls into the category of <Momentum> indicators and can be found in the respective tab of the indicators menu.
The default setup suggests the period of 14 for the main lines and sets the overbought line at 1.1 and the oversold line at 0.9. You can keep the default settings or change them according to your needs and trading style.
How to trade
Once you have applied the Vortex Indicator to the chart, it is time to read the signals.
By default, the uptrend line is of blue colour and the downtrend line is of purple colour on the chart.
Generally, the line that is in the top position shows if the asset is in the uptrend or downtrend. It is important to pay attention to the crossing points of the two lines, as well as their position in relation to the overbought and oversold lines.
The <buy> signal occurs when VI+ line is below the VI- line and crosses it from the bottom up, taking the top position. A <sell> signal can be determined when VI- line is below the VI+ line, and crosses above VI+ to take the top position among the trendlines.
On the picture you can see the Vortex Indicator applied to the EUR\USD chart. The crossovers on the example clearly show the change in the trend and the distance between the lines reflects the strength of the trend.
As this indicator is quite universal, it can be used both for short and long term trading.
Pairing the Vortex indicator with other indicators will help to avoid false trading signals, a good fit may also be MACD or ADX. Naturally, combining it with trend indicators will allow for a more accurate market analysis. It could also be helpful to implement such feature as a stop loss level, in order to manage manage the potential risks.
NOTE: This article is not an investment advice. Any references to historical price movements or levels is informational and based on external analysis and we do not warranty that any such movements or levels are likely to reoccur in the future.
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