Being well-versed and well-knowledgeable about technical indicators, as well as how to use and interpret them is an essential skill that every trader should have. It is for this reason that technical indicators provide a visible signal of the possible movements of the market. Presently, there are hundreds of technical indicators available for any kind of trading strategy. Among the newest yet widely used technical indicator is the Vortex Indicator. For this article, we’ll share with you all you need to know about the Vortex Indicator, how to use it, and how to incorporate other technical indicators like MACD for better trading.
The Vortex Indicator was introduced by Etienne Botes and Douglas Siepman – market technicians from Switzerland. It is a trend-following type of indicator which is used to spot trend reversals. It features two oscillators that capture the positive and negative movements of the trend in an existing market. Both oscillator lines move accordingly with the market. Trading decisions are based on this indicator when both the oscillator lines intersect each other. It can either signal reversal or significant price movement on a chart.
Computations for the Vortex Indicator lines are taken from specific price highs and lows during a specified time. The positive oscillator line is calculated by considering the range between the recent low and current high, whereas the negative oscillator line is calculated by considering the range between the last high and current low of the market. For highly volatile markets or strong price movements in the chart, the VI (Vortex Indicator) will display large gaps or huge distances between each oscillator.
The bigger the duration or period used in the settings, the bigger the gaps or distances between the oscillators. However, the smaller the period or duration used in the settings, the lesser the gap or distance between the oscillators. The use of smaller periods also presents more frequent crossing or intersection of the oscillators. With the increased frequency of crossing oscillators for lower periods, it becomes difficult to choose ideal entry and exits. Depending on the strategy being used with the Vortex Indicator, a higher period setting is recommended for better visibility of signals.
Often, the Vortex Indicator can provide a lot of signals which makes it hard to determine which signal is best to enter or exit a trade.
It is for this regard that the VI is associated with other indicators as a form of confirmation for the signal. Among the commonly used indicator to pair with VI is the MACD.
To set up the Vortex Indicator on Pocket Option, go to the list of indicators from the upper left corner of the screen and choose Vortex from the list.
MACD stands for Moving Average Convergence Divergence which is a technical indicator that measures the relationship between exponential moving averages or EMA. It also uses two oscillator lines that move depending on the assigned moving average.
The MACD is often used by traders to find reversal signals in a chart. This indicator is assumed to display levels in the chart where ideal entry and exit points are. These signals are determined whenever the oscillator lines cross or intersect each other.
The MACD oscillator lines move above and below a 0 line. The trend is assumed to be an uptrend if the oscillators are moving above the zero line. Whereas, the market is expected to be a downtrend if the oscillators are moving below the zero line.
When using MACD to find ideal entry and exit levels on a chart, traders usually consider only the intersections of the oscillators.
To set up the MACD Indicator on Pocket Option, go to the list of indicators from the upper left corner of the screen and choose MACD from the list.
The VI + MACD Strategy
Combining the Vortex Indicator with the MACD indicator makes signals much clearer and greatly reduces noise on the chart. As we’ve mentioned earlier about the Vortex Indicator, it is a great indicator to use for strong trends however may not be so reliable for weak trends or markets in consolidation with high volatility. To fix this problem with the VI, a secondary indicator can be used as a confirmation for signals – and that is through the MACD indicator.
So, the combined indicators present a way to determine signals on the chart, and at the same time verify the signal. To understand this strategy, let us consider a few examples from actual trades.
From this example, The Vortex Indicator uses a period of 21, while the MACD indicator uses a slower period of 26, and a faster period of 12.
For the Vortex indicator, the red line represents the negative oscillator, while the green line represents the positive oscillator. A signal for an uptrend is determined whenever the green line is on the top of the red line, and a downtrend is determined whenever the red line is on top of the green line. Notice how the significant fluctuations presented the best signals on the chart. Whereas, small fluctuations at the beginning of the Vortex Indicator did not present much good signal to enter or exit a trade.
For the MACD Indicator, an uptrend signal is determined if the green line is above the red line. On the other hand, a downtrend signal is determined if the red line is on top of the green line. For the case of the MACD Indicator, ideal entry and exits are signaled whenever the lines cross each other. Notice as well the size of the fluctuations – bigger fluctuations present better signals than small fluctuations.
From this example, we can note that the best signals are presented by huge fluctuations. Furthermore, the crossing of the Vortex Indicator should be confirmed by the crossing of the MACD indicator. Likewise, the crossing on the MACD indicator should not be more than 2 or 3 candles behind or early than crossing on the Vortex Indicator.
Our Final Thoughts
The Vortex Indicator is a great indicator to use to assess signals for possible entry and exit levels on a chart. As a way to avoid false signals and to reduce noise on a chart, the MACD indicator is incorporated in its use. Additionally, this strategy works great for any time frame – whether for day trading, swing trading, or long-term trading.
If you’re looking for ways to test and master the Vortex + MACD indicator strategy, try it out using a demo account on Pocket Option. With the demo account, you’ll get to trade in real-time using virtual funds.
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Good luck and Enjoy Trading!
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