The Vortex indicator is an effective tool that was first introduced by two traders from Switzerland in 2010. Although this feature may seem complicated to a beginner, having spent quite a bit of time studying, I became convinced of its usefulness. The instrument is based on two oscillators. You may have heard of them from a school physics course. As it turned out, oscillators are widely used in binary options trading. In general, “Vortex” is an English word that translates as “whirlwind”. For this reason, Russian-speaking traders often call it a “vortex” indicator.
Fitment Vortex is only gaining momentum in binary options, so some terminals brokerage companies still do not contain this functionality. A similar phenomenon was observed several years ago with other tools, without which it is already impossible to imagine modern trading. Therefore, we can safely say that in the near future the Vortex indicator will receive mass distribution, and its study should begin now.
What is Vortex
This is a trend indicator that includes two oscillators that capture two directions of trend movement: positive and negative. Blue Curve Line (VI +) shows the positive dynamics of price changes. Red Curve Line (VI-) responds to a negative impulse shift. When the blue line is above the red, the Vortex indicator indicates a general bullish trend, and the opposite line shift indicates the general market demand for put options for a given asset. Another powerful feature of the vortex indicator is that it shows the moments when the impulse becomes stronger, distributing the distance between the lines. The values of the oscillators fluctuate around unity. If the market is relatively calm, the amplitude (deviation from the average) will be negligible. If volatility increases, the amplitude will increase. On the graph, this is depicted in the form of two curves that intersect at some points in time, and also diverge relative to each other. Visually, it resembles a natural phenomenon, the name of which was given to this indicator.
It is important for any trader that the indicator gives the most accurate signals. At the same time, it should have maximum sensitivity to notify of any changes without delay. The vortex indicator fully complies with the above requirements, as I was convinced from my own experience of its use.
The tool in question is based on directional movement index (IND). It is an algorithm for assessing the correlation (relationship) between the dynamics of quotes and trends. As a result, the trader gets a powerful tool that allows you to determine the direction of the trend and volatility in real time.
What is an IND
Generally speaking, the IND is a range of the current trading period, not included in the range of the previous one. It can have a meaning with a “+” or “-” sign (that is, positive or negative). A positive IND is the part of the current candle located above the High-level of the previous candle. Similarly, a negative IND is the part of the current candle below the Low price of the previous candle. The current candle can be characterized by two INDs: a positive and a negative value (in this case, choose the maximum value in absolute value). If there is no IND candle, it is taken equal to zero.
Simply put, an IND is a sequence of negative, positive, or zero values that can be used to build two curves. The one located above determines the current trend, the strength of which is directly proportional to the distance between these curves. At the intersection of these lines, a change in the price trend occurs. I demonstrated the relationship between the described indicators and values in the figure below:
Vortex indicator - calculation
To perform the calculation manually, you need to perform three simple steps. But for this you need to know the definition of some terms, which I quote below.
A positive trend is the value corresponding to the difference between the current high and the previous low. The “positivity” of the trend movement is directly proportional to this difference (the more, the more positive). In turn, a negative trend is defined as the difference between the current low and the previous high.
Understanding what constitutes a positive and negative trend, we calculate the indicator:
- We determine the trend values based on the extrema (maximum and minimum values) of the two previous periods.
- We calculate the true range, which measures volatility based on the current values of the minimum and maximum prices.
- We find two quantities that are the quotient of dividing the positive and negative trend values by the true range value, respectively.
This indicator Vortex calculation results in two oscillators moving relative to each other over time.
The only drawback of the function is its unsuitability for tick charts, since Low and High candles are used for its calculation. For most traders, this limitation is not significant.
How to use the Vortex indicator
The function serves as a good base for building effective trading strategies. To add it to the chart, you can use the function search tool by their name, as shown in the figure below.
The curves are colored in different colors for ease of determining the downtrend and uptrend line, respectively. Depending on the location of these curves, traders can record the following events:
- Quotation growth - if the uptrend curve (KW) is located above the downtrend curve (CST).
- A drop in quotes is the opposite situation (KVT turned out to be lower than KNT).
- Weakening or reversal of the trend - the trend curve has moved away from a single value.
It makes sense to open positions in two situations: an uptrend curve crossed a unit level (short position), a downtrend curve crossed a unit level (long position).
Although the above information may seem difficult for a beginner, everything is learned in practice. Try to track the changes on the chart yourself, and you will see how powerful the Vortex indicator is. For example, there are times when the CST is located above the ITC. On the next candle, you can carry out a sale operation. If the next few candles of the CST will be near the unit level or even cross it and go down without crossing the ITC, the position can be kept open. It is necessary to close when the uptrend curve is excessively distant from the unit level. This is one of the common situations, but there are others.
The only configurable parameter of this tool is VI_Length - the duration of the summation interval of the IND. The lower the value of this parameter, the higher the sensitivity of Vortex to fluctuations in quotes. This parameter also affects the time interval, called signal delay. Therefore, before using the function, you must make the correct settings. In addition, it will not be superfluous to practice in order to reduce the risks of losses associated with an incorrect interpretation of the received signals.