The Vortex Indicator was developed as a new directional movement indicator. It is very similar to the directional movement indicator that originated from J. Welles Wilder.
The calculation of the index involves 8 steps.
1. Compute +VM = ABS(Today’s High – Yesterday’s Low)
2. Compute –VM = ABS(Today’s Low – Yesterday’s High)
3. Compute True Range
4. Compute A = sum of +VM for the past N days
5. Compute B = sum of –VM for the past N days
6. Compute C = sum of True Range for the past N days
7. +Vortex = A/C
8. –Vortex = B/C
The way to interpret the vortex indicator is similar to +DI and –DI indicators. When +Vortex is above –Vortex, the trend is bullish and when the reverse occurs, the trend is bearish.
Taking Wing Tai Holdings as an example, you can see clearly how the Vortex indicator captured the up swing and down swing respectively.
For more information on Vortex indicator, please refer to Technical Analysis Of Stocks & Commodities Magazine.
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