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Vortex Indicator

Vortex indicator is a comparatively new technical instrument designed by two Swiss traders E. Botes and D. Siepman in 2010. The indicator combines features of two classes of technical tools as it has two oscillating lines with a partial role of a momentum indicator. The most efficient trading strategy is the trend-following method in binary options based on different timeframes.

Vortex indicator deserved the attention of modern traders thanks to the high efficiency and reliability of trading signals as well as flexibility, which makes it applicable for trading binary options on any underlying asset class with any expiration time.

What is a Vortex indicator?


Like any other oscillator, the Vortex indicator (VI) is placed in a separate window below the price chart. It has two oscillating lines that reflect different trend momentum. The blue line (VI+) shows positive momentum of the price change. The red line (VI-) reacts to the shift of negative momentum. When the blue line is above the red one, the Vortex indicator points to the general bullish trend, while the opposite displacement of the lines indicates the overall market demand for put options for the asset. Another powerful feature of the vortex indicator is that it shows moments when the momentum is getting stronger by spreading the distance between lines. Crossovers show reversal points when the previous trend is getting exhausted and the price action is about to reverse. These additional technical signs make the Vortex indicator different from most of the oscillators, giving it a feature of well-known and powerful momentum indicators such as MACD and ADX.

This is how the Vortex indicator looks like:

Vortex Indicator

Mathematical background


The basic measurement of both positive and negative lines is based on comparing recent peaks and bottoms in the last two bars in the chosen period. The bullish blue line measures the distance between the current high and prior low rate, plotting the result within the length of the indicator (period) and adjusting with a true range (TR). The negative trend momentum is shown by the red line, which compares the current low with the prior high, making the same operation with the difference. Thus, the Vortex meaning reflects a short-term change in the price, while the distance between the two lines shows how volatile was the recent price action.

On top of reflecting the level of the current volatility in the market, the Vortex instrument points to the direction of the price change as comparing distances between the recent peaks and bottoms gives a mathematical reflection of the trend. If the positive surplus is constantly higher than the negative one, then call options are in demand and the trend is likely to continue in the same direction. The same conclusion is fair about a trend that shows a growing negative surplus between two lines as in this case, the market players are keen on buying Put options.

How to Calculate the Vortex Indicator?


There are several steps of calculations used in the Vortex lines formula.

True Range (TR) reflects the greatest value among:
  • Current high minus current low;
  • Current high minus previous close;
  • Current low minus previous close.

Uptrend and downtrend movement is:
  • VM+ = | current high - prior low;
  • VM- = | current low - prior high.

Uptrend and downtrend movement is:
  • VM+ = | current high - prior low;
  • VM- = | current low - prior high.

Trendlines VI+ and VI- are calculated as follows:
  • VI+ = SUM VMn+ / SUM TRn;
  • VI- = SUM VMn- / SUM TRn.

Best settings for Vortex indicator


The only parameter traders can adjust in the Vortex indicator is length or period. The default period is 14 bars (days or hours depending on the chosen timeframe). Binary options traders can change the length to get the maximum efficiency of the indicator depending on market conditions.

During a choppy price action when traders show indecisiveness in terms of the trend direction, the price chart is full of ups and downs in a tight sideways range. Thus, the Vortex indicator reflects those shifts by charting many crossovers as peaks and bottoms follow each other consequently. Therefore, the number of false trading signals is getting higher. In order to increase the accuracy of signals to buy a call or Put options, traders should enlarge the period. Best settings for Vortex indicator, in this case, are in the range of 14/34 bars with the middle value of 21 periods. The wider length of the formula allows smoothing changes of the price, lowering the sensitivity of the indicator and increasing the accuracy of trading signals.

During strong trends, crossovers happen not so often as the price action goes in one direction for most of the time. So the surplus between positive and negative trend momentum is getting wider, reflecting the low number of shifts in the technical sentiment. Therefore, traders should consider tightening the length of the Vortex indicator to get more trading signals that point to short-term corrections. This step would increase the overall profitability of a trading system based on Vortex indicator, helping traders to minimise losing deals. Best periods for trendy markets and short-term timeframes are in the range of 8/14 bars.

If you like Vortex trading strategy, you might also be interested in this Option Sniper Strategy

Vortex indicator strategy


Vortex strategy is based on following trends. As far as trading binary options suggests trading cycles when the price action goes in the same direction for quite a while, the sensitivity and accuracy of trading signals provided by Vortex indicator can help traders to maximise potential profits.

For example, when a crossover happens and both lines start spreading the surplus between them, a strong trend is born, signalling the beginning of a trading cycle. Once the spread starts narrowing, the Vortex tool could signal that the momentum of the previous trend is getting exhausted, and the likelihood of a retracement is getting higher. It would be better to stop the trading cycle and monitor the price action when VI+ and VI- lines are getting closer to each other. And if they do not perform the crossover, bouncing off each other, then it’s time to resume the trading cycle of buying options in the previous direction.

Otherwise, if the crossover occurred, then traders would consider buying options in the opposite direction as the indicator points to the reversal of the market momentum. Multiple crossovers signal the market’s indecisiveness when the trend’s direction is unclear. Although the Vortex indicator is a standalone technical tool, reflecting the technical sentiment, it can be used together with additional technical instruments to increase the overall efficiency of a trading system. For instance, it is possible to combine a short-length Vortex tool with a slow and less sensitive trend indicator such as MACD or Ichimoku cloud.

How to use the Vortex indicator?


The Vortex indicator provides a signal to start buying call options when V+ line crosses VI- line above after being below it. The trading cycle should be continued until both lines keep spreading the distance between each other, charting consecutive higher peaks of the blue line and consecutive lower bottoms of the red vortex line. After the maximum distance between lines is reached and VI+ starts declining towards the VI- line, it’s recommended to stop the trading cycle and wait for a clear signal about the further price action. If the opposite crossover between the lines occurs, then traders should start the cycle of buying put options. If both lines bounce off each other without the crossover, while VI+ remains above VI-, then traders should resume buying Call options.

Examples of profitable trades using the Vortex pattern


The hourly chart of the USD/JPY currency pair below shows that the Vortex indicator signalled the beginning of a trading cycle to buy put options (left red arrow) after VI+ and VI- lines crossed each other. When the largest distance between the two lines was reached, the cycle was interrupted and a binary options trader took a wait-and-see position. There was a bullish signal, but it was short-lived as the upside swing did not last long. After the second bearish crossover (right red arrow), the trading cycle of buying put options was resumed and the exchange rate was declining for 12 hours in a row. The local bottom of the price change was reflected by the Vortex indicator, which had the maximum spread between its lines, so the trading cycle was stopped. After that, the currency pair entered a sideways consolidation range with directionless price action, which was reflected in the indicator’s window as there were multiple crossovers.

Vortex Indicator

Conclusion


Vortex lines is a flexible technical analysis tool with multi-purpose applications for many asset classes and expiration times. Binary options traders often use the instrument to spot reversal points when the previous trend changes direction. Although the indicator is comparatively new, it gained popularity among technical analysts thanks to the accuracy and efficiency of its trading signals as it combines the features of standard oscillators with powerful advantages of momentum indicators. The tool can be used as a standalone indicator to build a trading system, as well as a part of combinations with several additional technical instruments to increase the overall profitability of trading binary options.


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