The Vortex indicator was developed by the Swiss market technicians, Etienne Botes and Douglas Siepman in January 2010. Since then, this indicator has gained huge popularity, as it continually produces accurate ‘buy’ and ‘sell’ signals. The indicator consists of two oscillating lines +VI and –VI (VI – Vortex Indicator). The +VI identifies the bullish price movements and the -VI the bearish price movements. The crossover between these two lines triggers the buy and sell signals in the market. The construction of the indicator revolves around the highs and lows of the last two days. The distance from the prior low to the current high indicates the bullish trend, and the distance between the current low and prior high indicates the negative trend. Both the +VI & -VI lines spread apart during the strong trend and gets closer during the weak trend or a consolidation phase.
The ‘buy’ signal is triggered when the positive line crosses above the negative line. Likewise, a ‘sell’ signal is triggered when the negative line crosses above the positive line. The default period setting is 14 periods, though if you are an experienced trader, you can choose any period according to your trading style. You can use this indicator standalone to generate trading signals, but do not forget that a single indicator often generates false signals. Hence combining a couple of other genuine indicators for double confirmation is necessary.
The green line is +VI and the red line is –VI.
Installing ‘Vortex Indicator’ in MT4 (step – by – step process)
By default, the Vortex indicator is not available in the MT4 Terminal, but it is available on the internet. Follow the link below to download the indicator.
Download the zip file from the link above, extract the file and paste it to your MT4 directory/MQL4.
Make sure to paste it in the ‘indicators’ folder.
Restart your MT4 Terminal.
Click on Insert > Indicator > Custom > Vortex Indicator.
As you can see below, we have applied the Vortex indicator to the USD/JPY chart.
Generating trade signals using Vortex Indicator
The basic strategy is to take the ‘buy’ trade when the +VI crosses the –VI and it is vice versa for the ‘sell’ trade. A lot of traders use this strategy in intraday trading, and it works most of the times. However, we do not recommend the standalone use this indicator as it might generate false signals. It is also prone to whipsaws, which makes it difficult for you to generate any money from the market.
So to solve this issue, we paired the Vortex Indicator with the SMA 100 period as it can help you in filtering the accurate signals.
Vortex Indicator trading strategy
Vortex Indicator + Moving Average
In this strategy, we paired the Vortex and Moving Average to identify the buy/sell signals. We use the 14-period Vortex Indicator setting and the 100 Period SMA to generate trading signals. The strategy is to see the position of SMA when combined with the Vortex Indicator. If SMA is above the price, only look for the sell signals on the Vortex Indicator. Likewise, if SMA is below the price, only look for the buy signals on the Vortex Indicator.
In the image below, the price was under the 100 periods SMA. So our goal is to only look for sell signals on the Vortex Indicator. As the –VI line cuts the +VI line, it can be considered as a sell signal. As you can see, right after the indication, prices dropped immediately. If you had taken this sell trade, you would have potentially made up to 40 pips in just a couple of hours. We suggest you place the Stop Loss order above the recent high in the market and place the Take Profit order at the most recent low.
One more important thing to remember is that, during strong market conditions, you can even go for the lower low in the market. But when the trend is not strong enough, do not consider the trading signals even if the Vortex Indicator is asking you to.
In the below EUR/USD 15 min chart, the SMA is below the price. This means the market is in an uptrend. We know that when the +VI cuts the –VI it is a buy signal for us. As you can see, right after the indication the market shoots up strongly. If we had placed a buy trade, we would have potentially generated around 70 pips from this trade, which is not that easy to make while day trading. This strategy is created by traders with a lot of experience, and it works beautifully in a trending market.
The fundamental thing to remember in this strategy is that,
If the SMA is below the price, then only look for the ‘buy’ signals on the Vortex Indicator
If the SMA is above the price, then only look for the ‘sell’ signals on the Vortex Indicator.
Limitations of Vortex Indicator
The only limitation of the Vortex Indicator is that it produces a lot of false signals if you use short-period settings. But if you use the longer-period setting, it will provide you with fewer signals, but generally, those signals will be extremely accurate.
The Vortex is a unique directional indicator. Along with the buy/sell signals, it also identifies the overall trend of the market. When the +VI is above the –VI, it means the market is in an uptrend. When the –VI is above the +VI, it means the market is in a downtrend. This indicator works on all the timeframes, and you can also use this indicator to analyse the monthly and weekly charts. By now, we believe that you got a complete understanding of the Vortex Indicator. Consider using this fantastic indicator in your daily trading activities and let us know if it has served you well in the comments below.