The Vortex indicator is a technical indicator that signals the formation of a new trend or the continuation of an existing trend, and can be used across all financial markets. It was developed by Etienne Botes and Douglas Siepman in 2010, who were partly inspired by the work of Welles Wilder and Viktor Schauberger. The indicator actually uses the ATR (Average True Range) in its calculation, created by Welles Wilder.
The Vortex indicator consists two trend movement lines plotted in a separate indicator window, called the +VI and the –VI. The +VI line, or positive trend movement, represents the distance of the current period’s high from the previous period’s low. And similarly, the –VI line, or negative trend movement, represents the distance of the current period’s low from the previous period’s high.
The Vortex indicator is calculated in three steps. The first step is to calculate the positive and negative trend movements (+VI and –VI), based on the highs and lows of the current and previous periods.
The larger the distance between the current high and the previous low, the greater is the value of the positive trend movement, +VI. And the larger the distance between the current low and the previous high, the greater is the value of the negative trend movement, -VI.
These values are then summed up based on the previous n periods, with the standard setting being 14 periods.
The second step involves Wilder’s ATR, which is used to adjust the positive and negative trend movements for volatility. The ATR uses the current period’s high and low and the previous period’s close to measure the volatility in the market.
Once the ATR is applied to the positive and negative trend movements, the Vortex indicator basically returns two lines which show the trend movements adjusted for volatility.
The complete formula used to calculate the Vortex indicator is shown below.
Step 1: Positive and negative trend movement
+VM = Current Period’s High – Previous Period’s Low (absolute value)
-VM = Current Period’s Low – Previous Period’s High (absolute value)
+VM14 = 14-period Sum of +VM
-VM14 = 14-period Sum of -VM
Step 2: Calculate the True Range of the last 14 periods
TR14 = 14-period Sum of TR
Step 3: Adjust the positive and negative trend movement for volatility
+VI14 = +VM14/TR14
-VI14 = -VM14/TR14
How to Interpret the Vortex Indicator
Despite the three-step calculation of the VTX indicator, its results are straight-forward to interpret. Generally, a crossover of the +VI and –VI trend movement lines can be used to identify a start of a new trend or the continuation of an existing trend. If the +VI line crosses above the –VI line, it signals an active uptrend. And if the –VI line crosses above the +VI line, it signals that a downtrend is under way.
The +VI and –VI crossover is also used for a simple VTX trading strategy. Similar to a Moving Average crossover, a buy signal is triggered when +VI crosses above –VI, and a sell signal is triggered when –VI crosses above +VI.