Investing & Trading

Vertical Horizontal Filter Study

By Samantha Baltodano


TL;DR:

The Vertical Horizontal Filter (VHF) is an indicator that measures trend activity and can help determine whether to use trend or momentum indicators for trading. 


It calculates the difference between the highest and lowest closing prices over a specified time period, divided by the sum of daily close changes over that same period. 


Rising values of the VHF may indicate a forming trend, while decreasing values may indicate that prices are falling out of a trend.



What Is Vertical Horizontal Filter Study?

The Vertical Horizontal Filter (VHF) was created by Adam White to identify trending and ranging markets. VHF measures the level of trend activity, similar to ADX in the Directional Movement System. Trend indicators can then be employed in trending markets and momentum indicators in ranging markets.


The VMH calculates the difference between the highest high and the lowest low during a specified time period. This difference is then divided by the sum of daily close changes over the same period.


Note that the study only considers absolute values of the differences between highs and lows, as well as those of the close changes.


Rising values of the VMH may indicate a forming trend, while decreasing values may indicate that prices are falling out of the trend.


Formula


To calculate the Vertical Horizontal Filter:


Select the number of periods (n) to include in the indicator. This should be based on the length of the cycle that you are analyzing. The most popular is 28 days (for intermediate cycles).


Then, determine the highest closing price (HCP) in n periods and the lowest closing price (LCP) in n periods.


Calculate the range of closing prices in n periods:

  • HCP - LCP


Next, calculate the movement in closing price for each period:

  • Closing price [today] - Closing price [yesterday]


Add up all price movements for n periods, disregarding whether they are up or down:

  • Sum of absolute values of ( Close [today] - Close [yesterday] ) for n periods


Divide Step 4 by Step 6:

  • VHF = (HCP - LCP) / (Sum of absolute values for n periods)


Trade Signals


The VHF indicator does not, itself, generate trading signals, but determines whether signals should be taken from trend or momentum indicators.


  • Rising values indicate a trend.
  • Falling values indicate a ranging market.
  • High values precede the end of a trend.
  • Low values precede a trend start.



Summary

  • The Vertical Horizontal Filter (VHF) is a technical indicator used to identify trending and ranging markets.
  • It measures the level of trend activity and can be used in conjunction with trend indicators in trending markets and momentum indicators in ranging markets
  • The VHF is calculated by determining the highest and lowest closing prices over a specified time period, and dividing the range of these closing prices by the sum of the absolute values of daily close changes over the same period
  • Rising values of the VHF may indicate a forming trend, while decreasing values may indicate that prices are falling out of the trend

Vertical Horizontal Filter is just one of many studies that Archaide automates. For a full list of strategies and studies available click here.


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