If you’re diving into technical analysis, you’ve probably heard of the Vortex Indicator, developed by Etienne Botes and Douglas Siepman. Let’s unpack what makes this tool a favorite among traders.
The Foundation: Directional Movement Index (DMI)
The Vortex Indicator is rooted in the Directional Movement Index (DMI), a concept pioneered by J. Welles Wilder in his landmark 1978 book, New Concepts In Technical Trading Systems. Wilder’s work laid the groundwork for traders to accurately identify market trends and significant price movements.
Understanding Directional Movement
At its core, directional movement analyzes the relationship between price bars to provide insights into market trends. Wilder famously stated, “Directional movement is the largest part of today’s range that is outside yesterday’s range.” This principle is key to using the Vortex Indicator effectively.
Positive and Negative Directional Movement
- Positive Directional Movement: This is the portion of a price bar that exceeds the high of the previous bar.
- Negative Directional Movement: This is the part of the price bar that falls below the low of the previous bar.
When calculating these movements, the smaller value is set to zero, while the larger value indicates market direction—up for positive and down for negative. If you encounter an inside bar (where neither the high nor low surpasses the previous bar), both directional movements are assigned a value of zero.
Interpreting the Vortex Indicator
What you’ll see on your chart are two columns of numbers representing positive and negative directional movements. By summing these values over 14, 21, or 55 periods, you can gauge the overall trend. As you track these movements, the two lines on your chart will intersect during trend changes, and they’ll diverge further apart as the strength of the trend intensifies. This functionality is the essence of Wilder’s DMI.
...
The Vortex Indicator has proven effective across various timeframes, offering a reliable method for determining trends.
Related Posts
- Unlocking MetaCOT 2: Your Ultimate CFTC Indicator Toolkit for MT4
- Unlocking the Power of Master Tools for MetaTrader 4
- Unlock Trading Insights with Volume Profile + Range v6.0 for MetaTrader 5
- Visualize Current Trends Across All Time Frames with This MetaTrader 4 Indicator
- Hourly Buffers for Data Collection in MetaTrader 5: A Simple Guide