In 1991, Adam White developed the Vertical Horizontal Filter indicator (VHF). Traders can use this indicator in technical analysis to recognize periods when the price is trending (up-trend or downtrend) or this indicator is in the congestion phase (side-way trend). This was first published in a magazine called “Issues of Futures”. Traders use the indicator to find out the Phase of a Price Trend.
What is Vertical Horizontal Filter Indicator?
In order to calculate High and Low Prices, Adam the developer of the Vertical Horizontal Filter indicator used 28 days of data. Also, he went to use 18-day data smoothed with a six-day moving average to study the VHF Indicator. It measures the trend activity and determines whether prices are in a trending phase or a congestion phase.
How to Attach the Vertical Horizontal Filter Indicator on Charts?
On Zerodha Kite
If the traders want to get more details regarding the Vertical Horizontal Filter indicator, then please open the STUDIES section of Zerodha Kite. The traders are also visiting in Kite Mobile App. The Period is 28 and if you want to change the value of the Period then you can change it. The traders can also check the attaching process of the VHF indicator to the Reliance Industries share price chart. This indicator is available includes daily, weekly, monthly, or intraday.
On Upstox Pro
The chart below is taken from a different platform, referred to as Upstox Pro. Here, in this article, we provide examples of Vertical Horizontal Filter indicators from different trading platforms. As we can see that the indicator rises with an up-trending signal while the falling VHF indicates a downtrend.
Calculation of the Vertical Horizontal Filter Indicator
To calculate the Vertical Horizontal Filter, you need to follow the steps that we are mentioning below.
- First, select the period’s number (n) to include in the indicator. It must be based on the length of the cycle that traders are analyzing. The default period is 28 days.
- After that determine the HCP (highest closing price) over n periods.
- Next, determine the LCP (lowest closing price) over n periods.
- Calculate the closing price range in n periods of time: HCP – LCP
- Next, you need to calculate the movement in the closing price for each of the periods: Today’s Closing price – Yesterday’s Closing price
- Then just Add up all price movements for n periods, disregarding whether they are up or down: Sum of absolute values of ( Close [today] – Close[yesterday]) for n periods
- Lastly, divide Step 4 by Step 6: Vertical Horizontal Filter = (HCP – LCP) / (sum of absolute values for n periods)
Features of the Vertical Horizontal Filter Indicator
- Adam White developed it to determine whether prices are trending in a particular direction or they are going through a transitional period on this system.
- It helps in determining the phase a stock is going through the indicator.
- This indicator is mainly used by traders to get rid of the limitations of Lagging Indicators like Moving Averages. Also, MACD can victimize Traders if the market is non-trending.
- Adam used the comparison of an interval’s rate-of-change to their range from high price to low price during a specified interval of time.
- The indicator removes this defect by using the trendiness of the market. Whenever there is an increase in this indicator, it indicates an upward or downward trend.
- On the contrary, when Vertical Horizontal Filter falls, then it is an indication of a Ranging Market.
Top 3 Elements of the Vertical Horizontal Filter Indicator
- This indicator is trend-following indicators that can be used to predict future trends.
- The rising Vertical Horizontal Filter indicates a trending market. Oppositely, a falling VHF indicator means a rangebound condition is developing.
- This indicator indicates an approaching congestion period when the indicator value goes too high. In the same way, extremely low indicator Values indicate an upcoming trending period in the market.
Trading Strategies of the Vertical Horizontal Filter Indicator
If we summarize the VHF indicator strategies, we get the points as follows:
Trend Signals on the Basis of Rising Indicator Value
A growing indicator line means the current trend is getting stronger. Have a look at the chart below. There growing indicator line forecast for the upcoming hike in price. And as a result, the price moved in the upward direction.
Now, this happens in the case of a downtrend also. As you can see below there is a chart. With the growing indicator, the ongoing downtrend is getting stronger.
Range Signals on the Basis of Falling Indicator Value
Oppositely, decreasing VHF value means a ranging market. As it is shown in the picture below. The price of the BAJFINANCE is making the same highs and lows a number of times. And, indicator value is also at a low level.
Indicator Peak or Trough
A very high value in the vertical horizontal filter indicator line indicates the possible trend is ceasing. Just like the following chart, here, the indicator line is almost at the top level compared to the previous average level. So, from there traders can assume that the ongoing uptrend is going to cease. And, the exact scene happens just after a big bearish inverted pin bar.
Reversely, a very low value means the possible beginning of a new upcoming trend.
The above chart, clearly shows that the VHF reached a very low level and from it moved. With the indicator line, the price level also moved to create a new trend
Pros and Cons of Vertical Horizontal Filter
- At that time of a congestion period, the Vertical Horizontal Filter indicator helps in determining the phase of the market.
- The VHF indicator determines the current as well as upcoming trends in the market.
- The indicator doesn’t generate trade signals like buy signals, sell signals, or buy and hold signals.
- This indicator doesn’t provide a clear indication of whether a trend follower should be used or an Oscillator.
The Vertical Horizontal Filter indicator is a great tool for traders who are looking to identify potential buy and sell signals. It can help filter out short-term market noise, allowing traders to stay focused on longer-term trends. The VHF allows traders to use it in combination with other indicators or systems for identifying and confirming useful trading signals. Ultimately, the strength of this indicator lies in its ability to give a visual representation of momentum while filtering out short-term fluctuations and producing smoother lines that clearly label trend direction.