Swiss market technicians Etienne Botes and Douglas Siepman introduced the vortex indicator (VI) in the January 2010 issue of the magazine Technical Analysis of Stocks and Commodities. Since then, this technical tool has gained traction as a reliable trend following🔴 indicator that caꦯn produce surprisingly accurate buy and sell signals.

However, it may still take a few more years of market testing and experience to fully evaluate the vortex indicator's potential. Here we take a closer look at the vortex trading strategies.

What is the Vortex Indicator?

The vortex indicator plots two oscillating lines: one to identify positive trend movement and the other to identify negative price movement. Crosses between the lines trigger buy and sell signals that are designed to capture the most dynamic trending action, higher or lower. There's no neutral setting for the indicator, which will always generate a bullish or bearish bias. You can find the complete vortex indicator calculations here.

Indicator construction revolves around the highs and lows of the last two days or periods. The distance from the current high to the prior low designates positive 澳洲幸运5开奖号码历史查询:trend movement, while the distance between the current low and the prior high designates negative trend m♚ovement. Strongly positive or negative trend movements will show a longer length between the two numbers, while weaker positive or negative trend movement will show a shorter lengꦚth.

Readings are usually captured over 14 consecutive periods (though the technician can choose any length) and then adjusted using J. Welles Wilder’s 澳洲幸运5开奖号码历史查询:true range. Results are posted as continuous lines beneath price bars, while 澳洲幸运5开奖号码历史查询:crossovers are compared to other trend-following indicators to produce valid 澳洲幸运5开奖号码历史查询:trading signals. Traders can use the vortex indicator as a standalone signal generator, but keep in mind that it is vulnerable to significant whipsaws and 澳洲幸运5开奖号码历史查询:false signals in congested or mixed markets.

Synergy With Other Indicators

Adjusting the vortex indicator to longer periods will lower the frequency of whipsaws but generate delayed positive or negative crossovers. On the other hand, shortening the length will elicit many crossovers that fail to generate significant trend movement. As a general rule, 澳洲幸运5开奖号码历史查询:high beta securities will respond better to shorter-term settings, while slow-moving securities r﷽espond better to longer-term settings. 🍃;

You can improve indicator reliability by comparing vortex indicator signals with other trend-following tools. The underlying math shows many similarities with 澳洲幸运5开奖号码历史查询:Wilder's average di🀅rectional i🥂ndex (ADX), the negative directional indicator (-DI) and the&nbs🐷p;positive directional indicator (+DI).

Those calculations translate into three lines that trigger complex crossovers. Unlike the vortex indicator, Wilder's system can issue neutral readings that tell traders to stand pat or avoid exposure.

澳洲幸运5开奖号码历史查询:Moving♉ average convergence divergence (MACD) analysis offers a perfect fit with the vortex indicator. Its construction with three moving averages lowers false readings triggered by multiple indicators that capture the same flawed data. When plotted with 澳洲幸运5开奖号码历史查询:histograms, the indicator g🉐enerates🗹 surprisingly few false signals, making it a perfect partner for the noisier and whipsaw-prone vortex indicator.

Synergistic trading strategies use a simple process that looks for sympathetic buy or sell signals in the vortex indicators as well as 🌊in other indicators before committing capital. The challenge comes in two forms: First, there need to be significant differences in data sources to avoid replicating flawed information, and second, indicator periods need experimentation and fine-tuning to focus on the intended holding period, whether short, intermediate or long term.

This last step of honing indicator periods is vital because trends exhibit time frame independence, allowing multiple uptrends and downtrends to evolve in different time segments on the same security. This fractal behavior will produce false readings if the vortex indicator is looking at one segment of trend activity while a second indicator looks at a second segment. Traders can overcome this flaw through trial and error, by watching how indicator pairs interact on various instruments and in various time frames. With MACD in particular, it's often best to leave settings alone and tweak vortex indicator periods instead.

A Vortex Indicator Trading Strategy

In the 2010 article that introduced the vortex indicator, authors Botes and Siepman described a vortex indicator trading strategy designed to filter out and limit false signals. The extreme high or low on the day of the bullish or bearish crossover becomes the intended 澳洲幸运5开奖号码历史查询:entry price, long or short. Those levels might not be hit on the day of the signal, prompting a 澳洲幸运5开奖号码历史查询:good-until-canceled buy or sell or🔴der that remains in place for multiple sessions, if required.

If positioned at the time of the crossover, the extreme high or low becomes the stop and reverse action level. In this strategy, a 澳洲幸运5开奖号码历史查询:short sale will be covered and reversed to the long side when the price returns to the extreme high following a positive crossover, while a 澳洲幸运5开奖号码历史查询:long position will be sold and reversed into a short sale after price returns to the extreme low following a negative crossover.

They also recommend combining these entry filters with other 澳洲幸运5开奖号码历史查询:risk management techniques, including 澳洲幸运5开奖号码历史查询:trailing and profit protection stops. These protective measures lower the incidence of false signals while maximizing profit on the underlying trend, even when it fails to gather significant momentum. However, this approach fails to deal with period length, which will trigger waves of false signals until adjusted to the predetermined holding period and then thoroughly 澳洲幸运5开奖号码历史查询:backtested.

Example 1: Microsoft

Let's use historical data from Microsoft Corporation (MSFT) to test the vortex indicator. As you can see in the graph below, Microsoft shares eased into a 澳洲幸运5开奖号码历史查询:narrow range in March 2014. This encouraged traders to watch for a profitable breakout.

Following the vortex indicator, there was a buy signal on March 14, but the price closed well below the extreme 澳洲幸运5开奖号码历史查询:intraday high at $38.13 per share. A trader would set a good-until-canceled (GTC) buy order that would execute when the security returned to that tri🔜gger price.

On March 17, the price did return with perfect timing, crossing over the breakout and lifting into the lower $40s. The indicator crossed over to the sell side on April 10, allowing a 澳洲幸运5开奖号码历史查询:profitable exit that missed a big chunk of upside.

MACD and a 澳洲幸运5开奖号码历史查询:trailing stop assist 澳洲幸运5开奖号码历史查询:trade management and suggested executing a long p𓆉osition one day later than the vortex indicator buy signal. They also issued a sell signal four days earlier, supporting a more profitable exit. Meanwhile, a trailing stop placed at the March 31 breakout line near $41 per share would have triggered when the security sold off on April 4, capturing an even greater share of the four-point uptrend.

Vortex Indicator and Price Patterns

The vortex indicator also works well when paired with classic 澳洲幸运5开奖号码历史查询:price pattern analysis in recognizing legitimate trends while filtering out whipsaws and other range-bound mechanics. Theoretically, this combination should generate the most reliable buy and seဣll signals at two inflection points:

1. When a well-developed 澳洲幸运5开奖号码历史查询:trading range is set to break out or break down.
2. When a trending market loses momentum or reaches a significant barrier that favors the transition into a new trading range.

The catalog of well-known 澳洲幸运5开奖号码历史查询:range-bound patterns, including flags, 澳洲幸运5开奖号码历史查询:rectangles, and 澳洲幸运5开奖号码历史查询:triangles, benefits this approach because natural breakout and breakdown levels have been fully deconstructed, allowing the trader to focus on the vortex indicator at the same time that price tests support or 澳洲幸运5开奖号码历史查询:resistance. Trend strength and durability can be further measured for cycle 澳洲幸运5开奖号码历史查询:convergence using 澳洲幸运5开奖号码历史查询:stochastics set at 5,3,3 or another 澳洲幸运5开奖号码历史查询:relative strength indicator.

Example 2: American Airlines 

American Airlines Group Inc. (AAL) carved out a classic 澳洲幸运5开奖号码历史查询:double top pattern between December 2014 and May 2015 and then breaks down in a significant downtr♏end. The vortex indicator issues a sell short signal eight sessions before the technical breakdown, e꧂ncouraging early short sales within the trading range. The crossover also works well as a secondary indicator for pattern traders looking to stack the odds in their favor.

A vortex indicator 澳洲幸运5开奖号码历史查询:cover short signal arrived s♛ix weeks later, sett𒊎ing up a profitable exit near $40 per share.

The Bottom Line

The vortex indicator relies heavily on the earlier work of J. Welles Wilder, the creator of several important technical indicators. The vortex indicator builds on a signaling mechanism for new and accelerating uptrends and downtrends. As with Wilder's indicators, the vortex indicator works best when combined with other trend-following systems and classic price pattern analysis.