Introduction
The Vertical Horizontal Filter (VHF) is a widely-used technical analysis tool that helps identify whether a market or security is moving sideways or trending. Developed in the 1990s by Adam White, a well-known financial analyst and trader, it has become a popular way to measure market volatility and market conditions.
The VHF is based on the concept that trending markets usually have higher volatility, while sideways markets have lower volatility. To calculate the VHF, one divides the absolute difference between the high and low prices over a given period by the sum of the absolute differences between each price and the previous price over the same period. This calculation yields a ratio, which is then multiplied by 100 to produce the final VHF value.
A VHF value ranging from 0 to 100 indicates whether the market is trending or moving sideways. Higher VHF values suggest a trending market, while lower values suggest a sideways or choppy market. Traders and analysts commonly use a VHF value of 50 as a threshold to distinguish between trending and sideways markets.
Traders often utilize the VHF in conjunction with various technical indicators and chart patterns to spot potential trading opportunities and enhance their decision-making process. Although Adam White has developed several technical indicators over the years, the VHF remains a widely-used tool in the financial industry today.
Computing the Vertical Horizontal Filter
The Vertical Horizontal Filter (VHF) is a technical indicator that measures whether a market or security is moving sideways or trending, and it is calculated using a specific formula. To compute the VHF, one would typically choose a specific period, such as 28 days, and then calculate the VHF value for each day within that period.
The formula for calculating the VHF is as follows:
VHF = (n / Sum) * 100
Where:
- n is the absolute difference between the current period’s highest price and lowest price
- Sum is the sum of the absolute differences between each price and the previous price over the same period
To calculate the VHF for a specific day, such as day 28, one would use the highest and lowest prices for that day and the previous 27 days, and the sum of the absolute differences between each day’s price and the previous day’s price for the same 28-day period.
Here is an example of how to calculate the VHF for day 28, assuming a 28-day period:
- Calculate n: Take the absolute difference between the highest price and lowest price over the 28-day period.
- Calculate Sum: Add up the absolute differences between each day’s price and the previous day’s price over the same 28-day period.
- Compute VHF: Divide n by Sum, multiply by 100, and round to the nearest whole number to get the VHF value for day 28.
Here is the formula in more detail:
- n = Absolute value of (Highest price in the past 28 days – Lowest price in the past 28 days)
- Sum = Sum of the absolute differences between each day’s price and the previous day’s price over the past 28 days
- VHF = (n / Sum) * 100
So, for example, if the highest price in the past 28 days was ₹108 and the lowest price was ₹81, and the sum of the absolute differences over the past 28 days was 126, then the VHF for day 28 would be:
n = ₹108 – ₹81 = ₹27
Sum = |₹96 – ₹89| + |₹89 – ₹81| + … + |₹81 – ₹90| = 126
VHF = (27 / 126) * 100 = 21.43
Therefore, the VHF value for day 28 would be 21.
In summary, to calculate the VHF, one would compute the absolute difference between the highest and lowest prices over a chosen period and then sum up the absolute differences between each day’s price and the previous day’s price for the same period.
The VHF value can be a useful tool for traders and analysts to identify potential trading opportunities and make informed trading decisions.
Understanding the Vertical Horizontal Filter Indicator in technical analysis
The Vertical Horizontal Filter (VHF) is a widely used technical analysis tool that helps traders and analysts identify trending and non-trending market conditions. The VHF offers several benefits, including:
Detecting trending and non-trending markets
The VHF can distinguish between trending and non-trending market phases. Higher VHF values indicate a trending market, while lower VHF values indicate a non-trending market. This information can help traders and analysts determine the optimal time to enter or exit trades.
Measuring market volatility
The VHF measures market volatility by considering the difference between the highest and lowest prices over a specific period and the differences between each price and the previous price over the same period. High VHF values suggest higher volatility, while low values indicate lower volatility.
Complementing other technical indicators
The VHF can supplement other technical indicators, such as momentum indicators or moving averages, to confirm or supplement trading signals. For example, if the VHF indicates a market is trending, a trader may look for other indicators to suggest potential entry points in the direction of the trend.
In summary, the Vertical Horizontal Filter is a flexible and helpful tool for traders and analysts seeking to identify market trends and make informed trading decisions. However, it is essential to use the VHF in conjunction with other tools and strategies to mitigate potential losses and to practice sound risk management.
Adam White‘s suggestions on how to use the Vertical Horizontal Filter Indicator
The Vertical Horizontal Filter (VHF) is a technical analysis tool created by Adam White that can be helpful in identifying market trends and volatility. Here are some tips from White on how traders can use the VHF effectively:
Identify market conditions
The VHF is best used to identify whether a market is trending or non-trending. Traders can analyze the VHF value over a certain period to determine the market’s condition. A higher VHF value suggests a trending market, while a lower value suggests a non-trending market. Adjust your trading strategy accordingly, such as using trend-following or range-bound strategies.
Combine with other indicators
White recommends using the VHF in combination with other technical indicators, like moving averages or oscillators, to confirm trading signals. For instance, if the VHF suggests a market trend, you can look for other indicators that support it.
Use multiple timeframes
Traders can use the VHF on multiple timeframes to gain a better understanding of the overall trend. For example, use a shorter-term VHF to identify short-term trends and a longer-term VHF to identify longer-term trends. This can help make better-informed trading decisions based on the overall market trend.
Manage risk
The VHF can be used to manage risk by setting stop-loss levels or adjusting position sizes based on market volatility. In high-volatility markets, use smaller position sizes to manage risk.
Also see: Stop Loss . . . and its importance in trading – Some ways of setting up stop loss levels
Understand limitations
The VHF has its limitations and is not effective in identifying trend reversals or changes in market direction. Traders should be aware of its limitations and use it in conjunction with other indicators to make better-informed trading decisions.
Backtest and practice
It’s essential to backtest and practice using the VHF in different market conditions to improve your ability to use it effectively in real-world trading situations.
In conclusion, Adam White recommends using the VHF to identify market conditions, combining it with other indicators, using multiple timeframes, managing risk, understanding its limitations, and backtesting and practicing to make better-informed trading decisions.
Advantages & Limitations of the Vertical Horizontal Filter Indicator
Here are some advantages and limitations of using the Vertical Horizontal Filter (VHF) in trading:
Advantages
- Identify trending markets: The VHF is a valuable tool for identifying whether a market is trending or not, helping traders adjust their strategies accordingly.
- Measure market volatility: The VHF can assist traders in measuring market volatility, which can be beneficial for managing risk and setting stop-loss levels.
- Multiple timeframe analysis: Using the VHF on various timeframes can provide traders with a better understanding of the overall market trend and aid in making well-informed trading decisions.
- Customizable periods: Traders can customize the VHF to different time periods, allowing them to tailor the tool to their specific trading strategies and preferences.
Limitations
- Limited effectiveness in identifying trend reversals: The VHF is not very effective in identifying trend reversals or changes in market direction, making it important to use it in combination with other indicators to obtain a more comprehensive view of market conditions.
- Historical data reliance: As the VHF relies on historical data to calculate market trends and volatility, it may not be effective in predicting future market conditions.
- Potential for false signals: Like all technical indicators, the VHF can generate false signals, leading to potential losses if traders act on them without confirmation from other indicators or market analysis.
- Limited application: The VHF is a specialized tool that may not be useful for all trading strategies, and traders should consider whether it aligns with their specific trading approach before incorporating it into their analysis.
The VHF is a technical analysis tool that enables traders to identify whether a market is trending or non-trending and measure its volatility. It provides valuable insights into market conditions and assists traders in making informed decisions. The VHF is customizable to different time periods, making it adaptable to various trading strategies and a versatile tool for traders.
Although the VHF is a valuable tool for technical analysis, it has certain limitations that traders should keep in mind. In some market conditions, the VHF may not be as effective and traders should supplement it with other indicators and market analysis to get a complete understanding of market conditions. It is important to note that the VHF can produce false signals, which can lead to losses if traders act on them without confirming with other indicators or market analysis. It is crucial for traders to understand the risks associated with trading and that there is no assurance of success with any trading strategy.
