According to original description of the authors (Etienne Botes and Douglas Siepman) of the Vortex indicator:
After thoroughly researching technical tools, we concluded that
the concept of the Directional Movement Index (DMI) offered the most
accurate way to identify trend direction or significant price moves in
the market. The concept of DMI was best defined and described by J.
Welles Wilder in his classic 1978 book "New Concepts In Technical
Trading Systems". The result of his work is the now-famous and highly
effective indicator, which inspired the creation of our Vortex
To understand the Vortex indicator better, we must describe
directional movement. The idea is that the individual relationship
between price bars provides clues to the direction of the trend or
market. Wilder summed it up thus: "Directional movement is the largest
part of today's range that is outside yesterday's range."
Positive directional movement is simply the portion of a price
bar that is above the high of the previous bar. Negative directional
movement is the portion of the price bar that is lower than the previous
low. The smaller of these two values is assigned a zero value. The
larger number is used to indicate if the market is moving up (positive)
or down (negative). In the case of an inside bar (if neither the high
nor the low is higher or lower than the previous bar), a zero value is
assigned to both positive and negative direction.
The result will be a string of seemingly random consecutive
zeroes or positive numbers placed in two columns assigned for positive
and negative directional movement. However, if these two strings of
numbers are summed after 14, 21, or 55 periods, the larger value gives
an indication of overall trend. If this process is continued, the result
can be seen on a chart as two lines representing positive and negative
directional movement. These will intersect and cross during a change of
trend and diverge wider and wider as the strength of the trend
increases. This is the basis of Wilder's DMI.
The article was published in the January 2010 issue of TASC.
We might add that Vortex seems to be working OK an all timeframes and can be used in a fairly reliable mode to determine trends.
Author: Mladen Rakic
could you add options to smoothing vortex? ( ;-) )
I liked but he scribbles a lot giving false entries