In order to calculate the VHF Indicator, all you have to do is to determine the
Highest Closing Price and Lowest Closing Price over a Specified Interval. The predetermined
Interval is usually comprised of 28 days.
HCP = Highest closing price in n-periods
LCP = Lowest closing price in n-periods
The very next step in calculation of Indicator is to determine the range i.e. difference
of HCP and LCP. After taking absolute value of the difference, place it in the numerator
of Indicator’s Formula.
Numerator = Absolute value of ( HCP - LCP )
In order to calculate the upper portion, add up the absolute value of difference
of each days closing’s price from the previous day’s closing for the
whole Interval period i.e. 28 days. To determine the denominator, sum the absolute
value of the difference between each day's price and the previous day's price over
the specified time periods.
Denominator = ∑ Absolute value of ( Closej - Closej-1 )
Where the range of 'J' is from '1' to 'n'.
The Answer of above formula is placed as the denominator of the Formula for VHF
VHF = Numerator / Denominator
One of the Prominent Dilemma of 21st Century is the determination of trending or
non-trending prices in the market. Trend-Following Indicators primarily MACD and
Moving Averages which are an excellent solution for trend following, tend to generate
multiple conflicting trade signals during Congestion Phase of Market. Contrarily,
Oscillators are handy in trading range, but often close positions untimely during
trending markets. Trendiness of Prices is used by VHF Indicator to assist traders
in choosing a right technical indicator in a particular situation.
In order to calculate High and Low Prices, Adam used 28 days data. Later on, he
went to use 18 day data smoothed with a six day moving average to study the Indicator.
There are three common ways to study VHF Indicator:
- VHF Outcome is a significant indicator of the trend prevailing in the market. As
the value of VHF moves upward, the degree of trending moves upward as well and vice
versa. This means that trend following indicators can be used to predict future
- Direction of VHF Indicator can be used to predict a Congestion Phase.
A rising VHF Figure indicates a trending market whereas a falling VHF Figure indicates
a Congestion Phase Developing.
- VHF Indicator can be used in situations contrary
to Typical Trend Followers. VHF indicates an approaching congestion period when
the VHF Value goes too high. Similarly, extremely low VHF Values indicate an upcoming
trending period in the market.
So, the traders can rely on the values of VHF. If the values of VHF are high, trend
would be sharp. Contrarily, if the VHF values are low, trend would be stable and
within a range. Similarly, high VHF values indicate a trend reversal approaching
Advantages of Vertical Horizontal Filter
- Trend Following Indicators could be costly if a Stock is going through a Congestion
Period. VHF Indicators helps in determining the Phase of the Market.
including RSI are handy when the market is ranging, but often signal premature decisions
when prices pull back.
- VHF Indicator determines the current as well as upcoming
trend in the market. If the VHF Values have gone too high, it means a trend reversal.
Similarly, if a price is too low, it shows an approaching congestion period.
Disadvantages of Vertical Horizontal Filter
- Vertical Horizontal Filter doesn’t generate trade signals i.e. buy signals,
sell signals or buy and hold signals.
- Vertical Horizontal Filter doesn’t
provide a clear indication to whether a Trend Follower should be used or an Oscillator.