Vertical Horizontal Filter (VHF) was created by Adam White. He described it in "Futures" magazine, August 1991. Its aim is to determine whether the asset prices are trending or not. If the VHF values begin to rise, it means a new trend just forms. If the VHF values fall, the trend is about to cease.
Every trader should also realize that very low VHF values mean the market is in Range, but it can also signalize that a new trend forms and it is just about to rise. Everyone should be prepared for possible price changes and a trend beginning.
To summarize it:
- Growing VHF values mean the trend gets stronger
- Decreasing VHF values mean a ranging market
- Very high values mean possible trend ceasing
- Very low values mean possible beginning of a new trend
Copyright © Picture made by Incredible Charts
VHF formula looks like follows:
VHF = (Highest High – Lowest Low) / ∑ ABS [(Close n – Close n-1) / (Close n-1)]
- Determine the Highest High for n chosen time periods (e.g. 28)
- Determine the Lowest Low for n chosen time periods
- Subtract the LL from the HH. The difference is always positive = (numerator)
- Add the absolute values of the differences (Price today – Price-1day ago) + (Price-1day ago – Price-2days ago)... until we sum all the chosen time periods (in this case 28 days) = (denominator)
- VHF = Numerator/Denominator
How to use the VHF indicator: Indicators like MACD work great in well trending markets. On the other hand oscillators like RSI and Stochastic work great when there is none trend prevailing. The higher the VHF value is, the greater the trend-following indicators and strategies should work. The lower the VHF value is, the more profitable the countertrend strategies should be. VHF helps us to differentiate when and what to use.
Note: White primarily recommended to use 28 days for the VHF calculation. Nowadays it is recommended to set it to 18 days period, smoothed by 6-days EMA.