Vortex Indicator (VI)
The Vortex Indicator (VI) is a technical analysis tool used to identify the direction and strength of a trend in the stock market. It was developed by Etienne Botes and Douglas Siepman in 2010. The VI consists of two lines – the Positive Vortex Indicator (+VI) and the Negative Vortex Indicator (-VI) – that measure the upward and downward movement of price respectively.
How the Vortex Indicator Works
The Vortex Indicator calculates the difference between two True Range values, one for buying pressure and one for selling pressure. The True Range measures the greatest of the following: the current high less the current low, the absolute value of the current high less the previous close, and the absolute value of the current low less the previous close.
The VI is calculated by dividing the current True Range value on the +VI by the True Range value on the -VI. This ratio shows the relationship between the two forces – buying pressure and selling pressure – which helps traders determine the strength and direction of a trend.
Interpreting the Vortex Indicator
When the +VI line crosses above the -VI line, it is a bullish signal indicating that buying pressure is increasing and the price may continue to rise. Conversely, when the -VI line crosses above the +VI line, it is a bearish signal indicating that selling pressure is increasing and the price may continue to fall.
Traders can also look for divergences between the Vortex Indicator and the price movement. If the VI is moving in the opposite direction of the price, it may signal a potential trend reversal.
Limitations of the Vortex Indicator
Like all technical analysis tools, the Vortex Indicator has its limitations. It is not foolproof and should be used in conjunction with other forms of analysis to confirm signals and trends. Traders should be aware of false signals and use risk management strategies to protect their investments.
