Vortex Indicator
Introduction
The Vortex Indicator (VI) is designed to identify the strength of trends and potential reversals in the market. Developed by Etienne Botes and Douglas Siepman, the Vortex Indicator consists of two lines: the Positive Vortex Line (+VI) and the Negative Vortex Line (−VI). These lines help traders determine bullish and bearish momentum.
Calculation of the Vortex Indicator
The Vortex Indicator involves several calculations:
- Calculate True Range (TR):
- Calculate Positive Vortex (+VI):
- UpMove = Current High - Previous Low (only calculated when positive)
- Calculate Negative Vortex (-VI):
- DownMove = Previous High - Current Low (only calculated when positive)
- Calculate Average True Range (ATR):
- The ATR is often calculated as a moving average of True Range over a specified number of periods.
Example Calculation
Assume we have the following data for a stock over five days:
Day | High | Low | Close |
---|---|---|---|
1 | 30 | 28 | 29 |
2 | 32 | 27 | 31 |
3 | 33 | 29 | 30 |
4 | 32 | 31 | 32 |
5 | 34 | 30 | 33 |
Step 1: Calculate True Range (TR)
- Day 2:
- Current High = 32, Current Low = 27, Previous Close = 29
- Day 3:
- Current High = 33, Current Low = 29, Previous Close = 31
- Day 4:
- Current High = 32, Current Low = 31, Previous Close = 30
- Day 5:
- Current High = 34, Current Low = 30, Previous Close = 32
Step 2: Calculate UpMove and DownMove
Day 2:
- UpMove = 32 - 28 = 4 (calculated)
- DownMove = 0
Day 3:
- UpMove = 33 - 29 = 4
- DownMove = 0
Day 4:
- UpMove = 0
- DownMove = 1 (31 - 32)
Day 5:
- UpMove = 4 (34 - 30)
- DownMove = 0
Step 3: Calculate +VI and -VI
Assuming simple smoothing for this illustration:
- For example, suppose we achieve averages of +DM and -DM over the period.
- Day 2:
- Day 3:
- Day 4:
- Day 5:
Step 4: Interpretation of Vortex Indicator
Trend Strength:
- A rising +VI indicates strong upward momentum, while a rising -VI indicates strong downward momentum.
Crossovers:
- A bullish signal occurs when +VI crosses above -VI, while a bearish signal occurs when -VI crosses above +VI.
Python Code
Analogy
Think of the Vortex Indicator like two rivers flowing in opposite directions. The +VI represents the river flowing strongly upstream (upward movement), while the -VI represents the river flowing downstream (downward movement). When the upstream river (bullish activity) flows faster than the downstream river (bearish activity), it signifies strong upward momentum. Conversely, when the downstream river flows faster, it indicates bearish momentum. Just as the strength of river currents can indicate the efficiency of transportation, the Vortex Indicator provides insights into market trends.
Conclusion
The Vortex Indicator (VI) is a valuable tool for traders to analyze market strength and identify potential buy and sell signals based on directional movement and volume. By understanding how to calculate and interpret the VI, traders can enhance their trading strategies.
References
- Investopedia: Vortex Indicator
- TradingView: Vortex Indicator