Trading Systems JAN 2010The Vortex Indicator by Etienne Botes and Douglas SiepmanThe Vortex Indicator by Etienne Botes and Douglas SiepmanThe search for a reliable technical indicator for trading a change in market direction seems to be a never-ending quest. Ideally, such an indicator should be on time; neither lagging the market nor too sensitive. The Vortex Indicator was developed as a new directional movement indicator, drawing inspiration in part from J. Welles Wilder’s directional movement indicator.
Welles Wilder Jr. Talks In his book New Concepts in Technical Trading Systems about volatility and describes his Volatility Index and Volatility System by using 14-day Average True Range (ATR) indicator. Some technicians use Wilder's Volatility when they talk about 14-day ATR, yet, Average True Range (ATR) is most recognized and most used name for this indicator.
The result is a simple but effective indicator that can be used to develop intriguing trading ideas.After thoroughly researching technical tools, we concluded that the concept of the directional movement index (Dmi) offered the most accurate way to identify trend direction or significant price moves in the market. The concept of Dmi was best defined and described by J. Welles Wilder in his classic 1978 book New Concepts In Technical Trading Systems. The result of his work is the now-famous and highly effective indicator, which inspired the creation of our Vortex Indicator.To understand the Vortex Indicator better, we must describe directional movement. The idea is that the individual relationship between price bars provides clues to the direction of the trend or market. Wilder summed it up thus: “Directional movement is the largest part of today’s range that is outside yesterday’s range.”Positive directional movement is simply the portion of a price bar that is above the high of the previous bar. Negative directional movement is the portion of the price bar that is lower than the previous low.
The smaller of these two values is assigned a zero value. The larger number is used to indicate if the market is moving up (positive) or down (negative). In the case of an inside bar (if neither the high nor the low is higher or lower than the previous bar), a zero value is assigned to both positive and negative direction.The result will be a string of seemingly random consecutive zeroes or positive numbers placed in two columns assigned for positive and negative directional movement. However, if these two strings of numbers are summed after 14, 21, or 55 periods, the larger value gives an indication of overall trend. If this process is continued, the result can be seen on a chart as two lines representing positive and negative directional movement.
These will intersect and cross during a change of trend and diverge wider and wider as the strength of the trend increases. This is the basis of Wilder’s Dmi.INSPIRATION FROM NATUREThe Vortex Indicator’s inspiration for another view on directional movement comes from an entirely different source. Viktor Schauberger (1885–1958), who is viewed as the father of “implosion technology,” was an Austrian forester, experimenter, and inventor. He sought to develop energy-producing machines that, through their shape, form, and motion, were able to mimic the power of nature’s processes. The foundation of his work came from studying nature and analyzing the fluidic vortexes of water in rivers and streams, and later in pipes and turbines.by Etienne Botes and Douglas SiepmanTechnical Analysis of S TOCKS & C OMMODITIESThe Traders’ Magazine since 1982has had over 1,226,237 subscribers from 174 different countries. Your Subscriber ID is locatedat the top of your magazine label, highlighted here in red.Your last name can be found on thesecond line, highlighted here in blue.If you have a company name on thelabel, that can also be used. It will appear below your name onthe label.If you do not have a Subscriber ID onyour label, you can find it on your statement or renewal form.For help locating your Subscriber ID number, please call us at 1-800-832-4642 orsend an email to.If sending an email, please include your name and mailing address.