The vortex indicator as a direction check

[Fairman]

The vortex indicator as a direction check

The vortex indicator is one of the newer ones, published in 2010, and it's simple once you see what it measures. It compares upward movement, the distance from the current high to the previous low, with downward movement, the distance from the current low to the previous high. Each is summed over a period, usually 14, and divided by the summed true range. You get two lines, VI plus and VI minus.

When VI plus is above VI minus, the bars are tending to extend upward from the previous bar's low more than they extend downward from the previous high. That's a sign of upward directional movement. When VI minus is above, the opposite.

It's similar in spirit to the directional movement lines in ADX, but the calculation is different and it tends to be a bit smoother.

I use it on M15 as a simple direction check before taking scalps on M1 or M5. If VI plus is clearly above VI minus on M15, I only look for longs on the lower timeframe. If the lines are tangled together, I treat the market as directionless and prefer range trades or nothing.

Crossovers on their own produce many false signals in ranges. The distance between the lines is more informative. Lines far apart point to a clear direction. Lines close together point to indecision.

[FXS HongKong Scalper]

Using vortex only as a direction check, not as a signal, suits it well. The crosses of VI plus and VI minus can whip back and forth in a range, but the gap between the two lines is a decent measure of how strong the direction is. On M5 I use a rule like only take longs when VI plus is above VI minus by at least 0.1. That removes the borderline cases. As with most indicators, it works better in sessions with a clear trend than in the slow hours between them.

[Fairman]

A quick way to quantify the distance is to subtract VI minus from VI plus and plot that as a single line. Values above a certain threshold indicate a strong up direction, and below the negative threshold a strong down. The threshold depends on the pair and timeframe. Looking at a few weeks of history usually shows what normal values look like, and where the clearly trending periods sit. Writing down those values for a few typical trend days and a few range days gives you a simple reference. It turns the indicator from a vague visual into a number you can use in a checklist.

[Fairman]

The period setting matters. With 14 on M15 you're covering three and a half hours, which spans more than one session sometimes. If you only trade London, that might include part of the Asian session, which can blur the reading early in the day. A shorter period, or using the indicator on M5 with a longer period, can help keep the reading tied to the current session. Another option is to set the indicator on M5 with a period covering about an hour or so, which keeps the reading focused on recent movement inside your session. Test which version matches what you see on the chart.