The Vortex indicator was developed by Etienne Botes and Douglas Siepman to analyze positive (+VI) and negative (-VI) price movements as an alternative to the Directional Movement Index which is a set of Positive (+DM) and Negative (-DM) Directional Moment.
In technical analysis, Vortex Indicator is used in the same way as Directional Movement indicator is used. Directional Movement (DX) consist of two lines - positive and negative (+DM and -DM) directional movement. Vortex indicator also consists of two lines - positive and negative (+VI and - VI) vortex. These two technical indicators are quite similar. Directional Movement Index uses extreme price change rom the previous bar (difference between current high and previous high and difference between current low and previous low) to build positive an negative directional movement lines. Vortex indicator, on the other hand, also uses extreme price changes (difference between current high and previous Low and difference between current low and previous High) to build positive and negative vortex lines. Basically, those are very similar indicators, just different price change is used to evaluate positive and negative price move (vortex in the case of VTX indicator).
A simple trading system based on the Vortex Indicator's technical analysis would suggest considering to sell when Positive Vortex (+VI) crosses below Negative Vortex (-VI) by indicating the stronger power of negative price changes. Controversially, when Positive Vortex (+VI) crosses above Negative Vortex (-VI) it would be an indication of stronger power of positive price movements and technical analysis would recommend to consider buying in this case.
Chart 1: 10-minute SPY stock chart with Vortex indicator: Blue line represent Positive Vortex (+VI) and red line represent Negative Vortex (-VI).
Vortex Indicator calculations could be split in several steps:
1. Calculate the current true range:
TR = Highest absolute value of either (current high - current low), (current low - previous close) or (current high - previous close)
2. Calculate the positive and negative vortex movements:
VMpos = absolute value of current high - previous low
VMneg = absolute value of current low - previous high
3. Calculate sum of TR and vortex movements over selected bar period P1
VMposSum = SUM (VMpos, p1)
VMnegSum = SUM (VMneg, p1)
TRsum = SUM (TR, p1)
4. Calculate final positive and negative Vortex Indexes -
blue and red lines plotted on a chart:
+VI = VMposSum / TRsum
-VI = VMnegSum / TRsum
By V. K. for MarketVolume.com