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NEW Trend Indicator That May Surprise You (Forex & Stock Strategies With Vortex Indicator) - YouTube
Channel: The Secret Mindset
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Knowing when to enter the market is one of
the most important skills in trading and investing.
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Your aim is to hop into emerging trends as
early as possible in order to catch the maximum
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price swing and one of the best ways to do
this is by predicting potential trend inceptions
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on a chart.
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One indicator that can help you do that is
the vortex indicator.
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So today we鈥檒l talk about a reliable trend
following tool, the vortex indicator and I鈥檒l
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show you how to i use it when I鈥檓 trading
stocks.
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Before we continue, if you鈥檙e new here,
make sure you subscribe, turn on the notification
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bell and leave a like to show your support.
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The vortex indicator (VI) is a relatively
new trend-following tool that you may have
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never heard of.
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This indicator signals the formation of a
new trend or the continuation of an existing
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trend, and it can be used across all financial
markets, although i use it mainly for trading
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stocks.
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The vortex indicator consists of two oscillators
measuring upward and downward movement, its
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development being inspired by the natural
flow and vortexes of water that occur in rivers.
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You can see a vortex pattern in your charts
by connecting the lows in the candles with
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the highs in the consecutive candles, and
then the highs with the consecutive lows.
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The bigger the difference between the low
of a candle and the next candle's high, the
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stronger the upward vortex (VM+).
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Likewise, the bigger the difference between
the high of a candle and the next candle's
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low, the stronger the downward vortex (VM-).
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The vortex indicator includes two trend movement
lines plotted in a separate window, called
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the +VI (positive trend movement) and the
鈥揤I (negative trend movement).
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The positive trend movement, represents the
distance of the current period high from the
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previous period low.
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And similarly, the negative trend movement,
represents the distance of the current period
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low from the previous period high.
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This indicator uses the average true range
in its calculation, meaning the current high,
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current low and prior close to measure volatility.
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So basically, to keep it very simple, the
vortex indicator normalizes the positive and
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negative trend movements by dividing them
by the true range.
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So, we could say that it shows volatility-adjusted
positive trend movement and volatility-adjusted
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negative trend movement.
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Like most indicators the vortex one can be
used in almost all time frames and is market-neutral.
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However, you will have better results when
you鈥檒l use it on longer time-frames, such
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as daily charts, because the "price noise"
in lower time frames will produce many false
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signals.
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If you do use the vortex indicator on a very
short time-frame, such as 5 minute chart,
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I suggest increasing the indicator鈥檚 value,
from 14 the default settings to 21 or 30,
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to smooth out lateral price movements.
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Now, how to trade with the vortex indicator.
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The vortex indicator plots two oscillating
lines: one to identify positive trend movement
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and the other to identify negative price movement.
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Crossovers between the lines trigger buy and
sell signals that are designed to capture
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the most dynamic trending action, higher or
lower.
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So, the simplest signals the indicator generates
are crossovers between positive trend movement
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VM+ and the negative trend movement VM-.
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When the positive vortex crosses above negative
vortex the trend is up, and if negative vortex
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crosses above positive vortex the trend is
down.
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The crossover strategy works perfectly when
there's a clearly defined trend.
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You can use the vortex indicator as a standalone
signal generator, but keep in mind that it
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is vulnerable to significant false signals
in congested or mixed markets.
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So pay attention when the market is in a consolidation
phase, because this system will generate false
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signals.
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To diminish the occurrence of false signals,
you could adjust the settings of the indicator.
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Adjusting the vortex indicator to longer periods
will lower the frequency of false signals
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but will generate delayed entries.
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On the other hand, shortening the period of
this indicator will lead to many crossovers
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that fail to generate significant trend movement.
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As a general rule, stocks with high volatility
will respond better to shorter-term settings,
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while slow-moving stocks will respond better
to longer-term settings.
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As with most indicators, the vortex one works
better when used with other studies and filters,
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like price action.
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A first filter is adding a simple moving average
(SMA) to the chart to act as a long-term trend
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filter.
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You open long trades if the price is above
the SMA and the +vi positive trend movement
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crosses above the 鈥搗i negative trend movement,
signaling an active uptrend
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You open short trades if the price is below
the SMA and -vi negative vortex line crosses
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above the +vi positive vortex line, signaling
that a downtrend is under way.
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This way you will not open trades that go
against the long term trend.
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A 200-period SMA is a good long-term filter.
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So here is a tesla daily chart since the beginning
of 2019.
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As the price stayed most of the year below
the 200 ma, only short trades were available.
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And here鈥檚 Walt Disney stock during the
same period.
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During the first 3 months of the year we witness
a lot consolidation above the 200 ma, and
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the signals weren鈥檛 as accurate.
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But since March 2019 we had 2 big buys, one
here, and another one here.
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Another method to reduce false signals is
to only place trades when either the positive
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trend movement VM+ or negative trend movement
VM- are above the 1.1 level.
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The two lines of the vortex indicator oscillate
above/below 1, and when there's a crossover
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it means that one of the lines goes above
1 or is very close to it.
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To increase your chances of trading when there's
a strong trend, you could wait for the positive
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line to go above 1.1 for a long entry, and
wait for the negative line to go below 0.9
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for a short entry.
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Also, here鈥檚 another filter you could use
to increase this indicator's effectiveness.
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You take note of the candle where a crossover
between the positive vortex line VM+ and negative
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vortex line VM- occurred, and you place a
limit order at the high or low of that candle.
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So you don鈥檛 enter when the crossover occurs,
you wait for the limit order to be filled.
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This way, the high or low of the crossover
candle will become the entry price of the
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trade.
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To make it very clear, instead of, for example,
opening a long position when the positive
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vortex line VM+ crosses above the negative
vortex line VM-, you'll place a conditional
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order 1 point above the high of the candle
where the crossover happened.
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Only if the prices goes above that candle's
high, the order will be triggered.
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As you can see in this example, there was
a bullish crossover, but the price never went
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above the high of the trigger candle, so the
trade was not opened.
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For a short entry, you'll place a conditional
order 1 point below the low of the candle
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where the crossover happened.
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Only if the prices goes below that candle's
low, the order will be triggered.
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If you pay attention at this chart, you can
observe a crossover here, but by using this
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filter, the trade never happened, as the price
went the other way.
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So, you could save a lot of bad entries if
you follow this simple filter.
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Here鈥檚 another important tip.
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When you see multiple crossovers in a short
period of time, this is a sign of market indecision,
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with no clear direction.
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It鈥檚 better to ignore the setup on that
stock and search or other opportunities.
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Take a look at this example.
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During February 4th to February 15th we had
multiple crossovers.
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That鈥檚 a lot of crossovers in a span of
10 days.
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When you see this pattern, it鈥檚 better to
abandon the setup, because the likelihood
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of a false signal is pretty high.
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Also, another clue is the distance between
the 2 lines of the vortex.
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Look at the range during the analyzed period,
it鈥檚 pretty tight, and that鈥檚 another
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sign of range bounding markets.
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Now, the vortex indicator can be used across
multiple timeframes.
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For example, you can apply it to weekly and
monthly charts to define the bigger trend
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and then apply it to the daily chart to generate
signals within that trend.
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Using the daily chart, you could focus exclusively
on bullish signals when vortex on the weekly
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chart indicates an uptrend and on bearish
signals when vortex on the weekly chart indicates
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a downtrend.
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Also, you can use other indicators or price
action in combination with the vortex indicator
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to confirm the existence of a trend.
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The vortex indicator is far from being a perfect
indicator and has its strengths and weaknesses,
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but when used correctly it could be a very
valuable addition to your trading toolbox.
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If you enjoyed this type of content, don鈥檛
forget to subscribe, click the bell icon and
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leave a like to show your support.
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Until next time.
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