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.
There are three ways to use the VHF indicator:
· VHF values above or below certain levels indicate the degree of trending. The higher the VHF, the higher the degree of trending.
· The direction of the VHF can be used to determine whether a trending or congestion phase is developing. A rising VHF indicates a developing trend; a falling VHF indicates that prices may be entering a congestion phase.
· The VHF as a contrarian type indicator. Expect congestion to follow high VHF values. Low VHF values may indicate a trending phase will soon follow.
Basically, the higher the VHF, the higher the degree of trending, and a rising VHF suggests a trend is developing whereas a falling VHF suggests that a congestion phase may be beginning. Some traders even use it in contrarian fashion (congestion periods can be expected to follow very high VHF values, look for a trend to develop after low VHF values). If you are intent on day trading with the Vertical Horizontal Filter, be aware that there is little evidence to suggest it is anything more than subjective on timeframes shorter than a few days.
VHF formula calculation consists in dividing the range between the highest and lowest close price values over a time frame (of 28 day accordingly to White’s original choice, although he now prefers an 18-day period averaged over 6 days) by the sum of the absolute values of the range between today and yesterday’s close over the same period.
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