The Vortex Indicator is a technical analysis tool that identifies the start of a new trend or confirms an existing trend. Developed by Etienne Botes and Douglas Siepman in 2010, it was inspired by the vortex motion found in water and how it creates distinct upward and downward flows.
What is the Vortex Indicator?
The Vortex Indicator consists of two oscillating lines: VI+ (positive vortex) and VI- (negative vortex). These lines measure upward and downward trend movements by analyzing the relationship between today's high/low and yesterday's low/high.
The concept: The indicator captures positive and negative trend movement by comparing how far today's high is from yesterday's low (upward movement) versus how far today's low is from yesterday's high (downward movement).
How the Vortex Indicator is Calculated
The calculation involves measuring the true range and directional movement:
Vortex Indicator Formula
VM+ (Upward Movement) = |Current High - Previous Low|
VM- (Downward Movement) = |Current Low - Previous High|
True Range (TR) = Max of (High-Low, |High-Previous Close|, |Low-Previous Close|)
VI+ = Sum of VM+ over n periods / Sum of TR over n periods
VI- = Sum of VM- over n periods / Sum of TR over n periods
Reading the Vortex Indicator
Understanding VI+ and VI-
- VI+ above VI-: Indicates upward trend or bullish pressure
- VI- above VI+: Indicates downward trend or bearish pressure
- Lines crossing: Signals a potential trend change
Signal Strength
- The wider the gap between VI+ and VI-, the stronger the trend
- When lines converge, the trend is weakening
- Lines oscillate between roughly 0.8 and 1.2 in most conditions
Key Trading Signals
Bullish Crossover
When VI+ crosses above VI-, it generates a bullish signal. This suggests that upward movement is now dominant and the price may continue higher.
Bearish Crossover
When VI- crosses above VI+, it generates a bearish signal. This indicates that downward movement is dominant and the price may continue lower.
Crossover Trade Example
Stock ABC has been ranging between $48 and $52:
- VI+ and VI- have been crossing back and forth (ranging market)
- Price breaks above $52 resistance
- VI+ crosses above VI- and the gap starts to widen
- This confirms the breakout has momentum
- Enter long with a stop below $50
- Exit when VI- crosses back above VI+
Vortex Indicator Trading Strategies
Strategy 1: Basic Crossover System
- Buy when VI+ crosses above VI-
- Sell when VI- crosses above VI+
- Use a stop loss at recent swing high/low
- Hold until the opposite crossover occurs
Strategy 2: Trend Confirmation
- Identify the trend using price action or moving averages
- In uptrends, only take long signals when VI+ crosses above VI-
- In downtrends, only take short signals when VI- crosses above VI+
- This filters out counter-trend signals that often fail
Strategy 3: Breakout Confirmation
- Identify key support and resistance levels
- Wait for price to break the level
- Confirm with Vortex Indicator showing the right crossover
- Enter only if both conditions are met
Optimizing the Period Setting
The default period for the Vortex Indicator is 14, but you can adjust it:
Shorter Periods (7-10)
- More sensitive to price changes
- Generates more signals
- Higher chance of false signals
- Better for short-term trading
Longer Periods (21-28)
- Smoother lines with fewer crossovers
- More reliable signals
- May miss some shorter moves
- Better for position trading
Combining with Other Indicators
Vortex + ADX
The Average Directional Index (ADX) measures trend strength. Combine them for better signals:
- Take Vortex crossover signals only when ADX is above 25
- Avoid signals when ADX is below 20 (ranging market)
- This combination significantly reduces false signals
Vortex + Moving Averages
Use moving averages to filter trend direction:
- Only take bullish Vortex signals when price is above the 50 EMA
- Only take bearish Vortex signals when price is below the 50 EMA
Vortex + RSI
Add RSI for momentum confirmation:
- Bullish Vortex crossover + RSI above 50 = stronger bull signal
- Bearish Vortex crossover + RSI below 50 = stronger bear signal
Common Mistakes to Avoid
1. Trading Every Crossover
In ranging markets, VI+ and VI- will cross frequently without any meaningful trend developing. Use additional filters to avoid these whipsaws.
2. Ignoring the Distance Between Lines
A crossover is more significant when the lines then separate widely. If they stay close together after crossing, the trend is weak and the signal is less reliable.
3. Not Using Stop Losses
Like all indicators, the Vortex Indicator generates false signals. Always use stop losses to protect against trades that do not work out.
Advantages of the Vortex Indicator
- Clear signals: Crossovers are easy to identify
- Trend identification: Shows both direction and strength
- Works on all timeframes: From intraday to weekly charts
- Less noise: Smoother than many momentum oscillators
Limitations of the Vortex Indicator
- Lagging indicator: Signals come after the trend has started
- Whipsaws in ranges: Many false signals during consolidation
- No overbought/oversold levels: Cannot identify extremes
Track Your Vortex Indicator Trades
Pro Trader Dashboard helps you analyze which indicator setups work best for your trading style. Track your Vortex-based trades and measure your actual performance.
Summary
The Vortex Indicator is an effective tool for identifying trend direction and timing entries. Its two-line system clearly shows when bullish or bearish forces are dominant. For best results, combine it with trend filters like ADX or moving averages to avoid false signals during ranging markets.
Want to explore more trend indicators? Check out our SuperTrend Indicator Guide or learn about the Aroon Indicator.