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Academy > Technical Analysis > What Is Vortex Indicator: Buy/Sell Signals Inspired by Nature >

What Is Vortex Indicator: Buy/Sell Signals Inspired by Nature

2022-08-30 06:51:55

Summary: 

  • The Vortex Indicator is a technical indicator that was developed to identify trends in the markets. It was inspired by this natural phenomenon of masses of fluid that whirl in the ocean known as a “vortex.”
  • The most common Vortex trading system is based on the crossover between the VI+ and the VI- line. If the VI+ line goes above the VI- line it is a buy signal and if the VI- line goes over the VI+ line it is a sell signal.
  • The indicator was historically accurate in predicting breakouts and price reversals for Bitcoin and altcoins. It is similar to the Directional Movement Indicator (DMI) but more accurate due to vortex motions.

vortex-indicator

What is the Vortex Indicator? 

The Vortex Indicator (VI) is a new trend indicator that was developed in 2010. The primary function of the indicator is to identify the formation of new trends in the market, making it a leading indicator. The Vortex trend indicator provides buy and sell signals that help traders make profitable trades using the Vortex crossover strategy. The indicator had historical accuracy as demonstrated in our Bitcoin (BTC) and Ethereum (ETH) examples below.

There are hundreds of trend indicators that differ based on underlying moving averages and formulas. This indicator is unique because it was modeled after the flow of water. The name “Vortex” is inspired by an oceanic vortex. Motions in the wavelengths of an oceanic vortex (whirling fluid) are predictable and the inventors used them to produce an easy-to-understand indicator formula.

The indicator is an oscillating indicator that appears in a box below the chart. There are two lines: “VI+” and “VI-“. These have separate formulas and indicate bullish and bearish motions. The key to trading with the indicator is to use a crossover strategy – i.e. waiting for the two lines to intersect and cross. During a crossover, if the VI+ line goes above the VI- line this is a buy signal that warrants a long order and vice versa.

Who Invented The Vortex Indicator? 

The Vortex Indicator was invented by Etienne Botes and Douglas Siepman, based on discoveries of Austrian scientist Viktor Schauberger. The indicator was introduced in the “Technical Analysis of Stocks & Commodities” magazine in January 2010. It is one of the newest indicators that were developed for the stock market and later adopted for crypto trading.

Schauberger is known as the father of implosion technology. He spent decades studying the flow of water in rivers and oceans. He specifically observed the natural phenomenon of the flow of water being spun in vortexes in the ocean. In a real-life vortex, the water oscillates directionally up and down; this can be mimicked in the stock markets.

The co-founders of the VI indicator worked on the idea with the help of J. Welles Wilder’s directional movement theories and created two directional oscillators that were merged to track positive and negative movement. The team stated: “We shared our vision for the benefit of the financial industry and released it for free”. It is currently one of the most popular indicators.

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What Is The Vortex Indicator Formula? 

A vortex pattern can be observed in the markets when there are two positive and negative oscillators: One VI+ positive oscillator and one VI- negative oscillator. The formula connects the highest recorded averages and the lowest recorded consecutive averages and then the lowest recorded averages with the highest consecutive averages.

The positive VI+ oscillator measures the difference between the lows and highs and the VI+ measures the difference between the highs and lows. Once these two intersect, we have a “crossover” that dictates where the price is likely to move.

The Vortex Indicator formula is the following:

VI(n)+ = VM(n)+ / TR(n)

VI(n)- = VM(n)- / TR(n)

The VI+ (positive) and VI- (negative) oscillators require individual calculation. We first calculate the upward and downward momentum. The positive momentum is calculated measuring the n period high minus the n period low. The negative is measured with the n period low minus the n period high. On Phemex, the default n period is 14, signifying that it takes averages from 14 days on the daily chart or 14 hours on the hourly chart.

The formula then calculates the periods (user-defined). For example, on a 14-period VI indicator we calculate VM14+ = 14 period sum of VM+ and the same for the negative oscillator. The True Range volatility measurement is then added by calculating the current high minus the current low. We apply the full formula and divide the VI+ or VM- by the True Range for each oscillator.

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How to Use Vortex Indicator on Phemex?

Let’s use the Phemex platform to get started. Pick among hundreds of trading pairs on the “Markets” tab. For this demonstration, we’re going to use the BTC/USDT chart. Click on the “Indicators” dropdown at the top.

vortex indicator 1

 

The built-in search engine will appear, allowing you to search for the indicator. Type in “Vortex Indicator” and it will locate it among dozens of other indicators:

vortex indicator 2

To activate it underneath the Bitcoin chart, left-click on the indicator and it will load in a separate box:

vortex indicator 3

The n-period is 14 by default, which means the formula is applied over 14 daily bars. If we want to change the settings, we can press on “Settings” at the bottom-left of the chart:

vortex indicator 4

The best Vortex Indicator settings for intraday (short-term) trading are the default settings with a 14-period. The sensitivity of the indicator decreases if we extend the n-period over a longer period, which means the VI+ and VI- lines have less crossovers. However, longer periods such as 50 or 100 might be suitable for long-term price movements. Make sure to choose the periods based on your trading style.

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How to Trade With the Vortex Indicator?

The Vortex crypto indicator alerts traders when a new trend is about to start, making it effective for crossover trading. The Vortex crossover strategy sends buy and sell signals when the VI+ line intersects with the VI- line.

A bullish (buy) signal is generated when the VI+ line crosses above the VI- line and a bearish (sell) signal is generated when the VI- line crosses above the VI+ line. Below we’ve laid out two examples to show the effectiveness of the indicator with Bitcoin and Ethereum. The focus is on long-term trading with a 50-period n average.

Bitcoin

The Bitcoin price performance over the last two years was marked by extreme bullishness, with few downtrends. By using 50 periods for long-term calculations, we can verify the historical accuracy of the indicator:

vortex indicator 5

The Bitcoin bull run started in late 2020 and the VI+ (blue line) crossed from the VI- (red line) and deviated above it. This was marked by a 600% price surge in less than a few months. The lines remained separate until they crossed over again in May 2021 which was followed by the May 2021 crypto crash.

The crossover was noted again prior to September and Bitcoin marked consecutive bullish performance over three months until it reached an all-time high of $69,000. The next crossover was a bearish divergence when the red VI- line crossed over the VI+ line and Bitcoin broke down over 40%. The current levels indicate bearish sentiment but the lines haven’t crossed.

Ethereum

Ethereum is the second largest crypto by market cap. It has historically followed the Bitcoin price action with few deviations during “alt season” i.e. a period in which Bitcoin cools off and altcoins go on the run. Similar trend patterns applied to Ethereum’s price uptrends and downtrends over the last two years:

vortex indicator 6

The VI indicator cross occurred in October 2020 when Ethereum started a massive bull run, rising from $360 at the time up to $4,400 within less than 6 months–providing a 1,200% return for investors. The VI+ and VI- lines briefly touched, however, did not cross over in April 2021. The next crossover was in May 2021 during the large crypto crash. The indicator has since provided reliable buy and sell signals which was reflected in the price action.

Vortex Indicator vs DMI: Which Is Better?

The closest indicator to the Vortex Indicator is the Directional Movement Indicator (DMI). The Directional Movement Indicator predicts strong price trends and fluctuations in the crypto market. Both trading indicators can be loaded simultaneously on Phemex:

vortex indicator 7

The Directional Movement Indicator provides nearly identical crossovers when smoothed over 50 periods on the daily chart. However, we can see that the Vortex Indicator was more accurate for predicting the recent Bitcoin breakout while the DMI indicator did not have a crossover at all.

Conclusion

The Vortex Indicator is a high-level indicator developed for experienced traders. It is quite a unique indicator that gained popularity in a short time. The popularity of this indicator is likely attributed to its effectiveness.

To develop an effective Vortex trading system, a trader has to know how to utilize the settings based on their trading goals. The indicator can be applied to long-term weekly and monthly charts that shape a bigger trend or short-term trading for temporary trends.

For long-term trading, a trader can extend the n-period over 50 or 100 to get accurate signals. For short-term trading, they could leave the default settings or adjust for an even shorter period such as 5 or 10. The indicator is equally effective for Bitcoin as it is for altcoins and can be used on all Phemex trading pairs. For more indicators, check out the Phemex technical analysis section.


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