In 1991, Adam White developed the Vertical Horizontal Filter indicator. 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 (VHF) indicator used 28 days of data. Also, he went to use 18-day data smoothed with a six-day moving average to study the Indicator. It measures the trend activity and determines whether prices are in a trending phase or a congestion phase.
How to Put the Vertical Horizontal Filter Indicator on Charts?
If the traders are 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 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.
The above chart is taken from a different platform, refers to as Upstox. Here, in this article, we provide examples of Vertical Horizontal Filter indicators from the different trading platforms. As we can see that the VHF rises with an up-trending signal while falling VHF indicates a downtrend.
How to Calculate the Vertical Horizontal Filter Indicator?
To calculate the Vertical Horizontal Filter, you need to follow certain steps.
- First, select the periods’ 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: VHF = (HCP – LCP) / (sum of absolute values for n periods)
What are the Important Key Factors of the 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 that 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 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 (VHF) falls, then it is an indication of a Ranging Market.
What are the Top Three Elements of the VHF Indicator?
- This indicator is trend-following indicators that can be used to predict future trends.
- The rising Vertical Horizontal Filter (VHF) indicates a trending market. Oppositely, a falling Vertical Horizontal Filter (VHF) indicator means a Congestion Phase is Developing.
- This indicator indicates an approaching congestion period when the VHF Value goes too high. In the same way, extremely low VHF Values indicate an upcoming trending period in the market.
What are the Profitable Trading Strategies of the VHF Indicator?
If we summarize the VHF indicator strategies, we get the points as follows:
- Growing the VHF Indicator line means the current trend gets stronger.
- Have a look at the chart below. There growing the VHF forecast 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 in the chart. With the growing VHF, the ongoing downtrend is getting stronger.
- 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, the VHF is also at a low level.
- A very high value in the VHF line indicates the possible trend is ceasing.
- Just like the following chart. Here, the VHF 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 candle.
- Reversely, very low value means the possible beginning of a new upcoming trend.
- In the above chart, it 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.
Advantages of Vertical Horizontal Filter
- At that time of a congestion period, Vertical Horizontal Filter (VHF) indicator helps in determining the phase of the market.
- The (VHF) indicator determines the current as well as an upcoming trend in the market.
Disadvantages of Vertical Horizontal Filter :
- The indicator doesn’t generate trade signals like buy signals, sell signals or buy and hold signals.
- This VHF indicator doesn’t provide a clear indication of whether a trend follower should be used or an Oscillator.
So, briefly, if the values of VHF are high, then the trend would be sharp. And another way, if the VHF values are low, then the trend would be stable and within a range. Hence, in the same way, high VHF values indicate a trend reversal approaching the market.