The Vortex indicator was developed by Swiss technical experts Etienne Botes and Douglas Siepman and published in the January 2010 edition of Technical Analysis of Stocks & Commodities. Since then, this indicator has gained immense popularity amongst forex traders. It is commonly used to help identify the start of a new trend or the continuation of an existing trend within financial markets.
What is the Vortex indicator?
The indicator consists of two oscillating lines: + VI and –VI (where VI is the Vortex Indicator). + VI is indicated by the green line and defines the bullish price movement, and –VI is indicated by the red line that determines the bearish price movement. The intersection between the two lines triggers the buy and sell signals.
The indicator construction revolves around the highs and lows of the last two days. The distance from the previous low to the current high indicates a bullish trend, and the distance between the current low and the previous high indicates a bearish trend.
For a better understanding of the Vortex indicator, we should describe the directional movement. The idea is that individual relationships between price bars give an idea of the direction of a trend or market. Wilder summed it up as follows: “Directional movement is the largest part of today’s range that lies outside yesterday’s range.” Positive directional movement is simply part of the price bar that lies above the high of the previous bar. Negative directional movement – part of the price bar, located below the previous minimum.
The smaller of these two values is assigned a zero value. A larger number is used to indicate whether the market is moving up (positive) or down (negative). In the case of the inner bar (if neither the maximum nor the minimum is higher or lower than the previous bar), a zero value is assigned to both positive and negative directions.
Vortex indicator features
- Any trading platform
- Trading around the clock
- Any timeframe
- Any currency pair or other trading instrument
- Short, mid and long-term trading strategies
How to use the Vortex indicator?
A buy signal is triggered when a positive line crosses a negative line from bottom to top. Similarly, a sell signal is triggered when a negative line crosses a positive line from top to bottom. The default period is 14, but if you are an experienced trader, you can choose any period according to your own trading style. To increase the accuracy of the intersection points + VI and -VI, we suggest that you experiment with setup methods to filter and limit the capture of false transactions.
If you have an existing long position, and the Vortex indicator suggests a short position, the low could become your point for exiting and entering short. If this does not happen, you may choose to remain in a long position. The indicator may return to a positive state, saving you from a false stop and entry. We will explain this in detail with examples of our transactions. Even if -VI stays below + VI on many non-trending bars, your short entry point could remain at the initial crossing bar. It may seem strange to delay entry at a higher price, whether long or short.
However, as with other indicators, the Vortex indicator is not always accurate, and this method will save you from a significant number of false signals. Further, it may be that you are already taking a long position. This should filter out a false, short signal to your advantage, and vice versa. In the case of the side market, many such intersections may appear, but using the same trading setup will help you filter out these false transactions.
You can use this indicator separately to generate trading signals, but do not forget that one indicator often gives false signals. Therefore, it is often necessary to combine several other technical indicators for double confirmation and other methods of market analysis.
Vortex indicator trading strategy
The main strategy is to close a buy deal when + VI crosses –VI, and vice versa, for a sell deal. Many traders use this strategy in intraday trading. However, I do not recommend using this indicator autonomously, as it can generate plenty of false signals from my experience using it. Therefore, to solve this problem, we can combine the Vortex indicator with the SMA 100 moving average to ensure that we trade in the direction of the overall trend.
Vortex indicator & SMA 100
In this strategy, we use a 14-period Vortex indicator and a 100-period SMA to generate trading signals. The strategy is to trade only those signals that satisfy the conditions of the SMA 100. If the SMA is above the price, look only for sell signals on the Vortex indicator. Similarly, if the SMA is lower than the price, look only for buy signals on the Vortex indicator.
Vortex indicator sell trade
In the image below, the price is below the 100 SMA. Therefore, our goal is to look only for sell signals on the Vortex indicator. When the –VI line crosses the + VI line from top to bottom, this can be seen as a sell signal. As you can see, prices immediately fell after the trading signal. I would place a stop-loss order above a recent high in the market and aim for a favourable risk to reward ratio.
Another important thing to remember is that in a volatile market, you can even go for a lower low in the market. But when the trend is not strong enough, we may wish to refrain from trading.
Vortex indicator buy trade
On the 15-minute USDCAD chart, prices are above the 100 SMA. This means that the market is in an uptrend. We know that when the + VI line crosses the –VI line from the bottom up, this is a buy signal. As you can see, immediately after the signal from the Vortex indicator, the market went up sharply.
Vortex indicator conclusion
The Vortex indicator is a unique trend determination tool. Along with buy/sell signals, it can also help determine the general market trend. When the + VI line is above the –VI line, this means that the market is in an uptrend. When –VI is above + VI, this means that the market is in a downtrend. This indicator works on all time frames, and you can also use this indicator to analyze monthly and weekly charts.
The main limitation of the Vortex indicator is that it gives a lot of false signals, especially if you apply it to smaller chart timeframe periods. However, if you use an indicator with a longer period, it can give you fewer signals, but in general, these signals can often be more reliable.
I would prefer to use the majority of technical indicators such as the Vortex indicator on the 1-hour charts and above. I tend to find that these charts contain less market noise than the lower time frames and thus give more reliable signals for my forex trading strategies. This also means that I spend less time staring at charts and can also set alert notifications to let me know when price has reached certain levels or a particular indicator value has been reached.
The Vortex indicator is just one indicator amongst thousands. I would not build a trading system alone, but rather combine with other technical indicators such as moving averages, Parabolic SAR, Stochastic Oscillator, RSI, ADX and price action analysis.
Of course, every trading system will generate false signals which is why money management is so important. I would personally be implementing sensible money management and only take traders that give me a favorable risk to reward ratio, ideally of at least 1:3. This means that one losing trade does not wipe out consecutive winners.
The methods of implementing the Vortex indicator into a trading strategy that are outlined within this article are just ideas. I would always ensure that I have good money management, trading discipline and a trading plan when using any forex strategy.
Furthermore, I would combine multiple technical analysis, fundamental analysis, price action analysis and sentiment analysis to filter all entries. You should trade forex in a way that suits your own individual style, needs and goals.
If you would like to practice trading with the Vortex indicator, you can open an account with a forex broker and download a trading platform. If you are looking for a forex broker, you may wish to view my best forex brokers for some inspiration.