Purpose:
The Vertical Horizontal Filter (VHF) is a technical indicator that helps traders determine whether a market is in a trending phase or a choppy, sideways movement phase. It is primarily used as an indicator of market volatility, helping traders decide whether to use trend-following or mean-reversion strategies.
Key Components:
- Trend vs. Choppy Market Identification:
The VHF calculates the ratio between the vertical distance (price range) and the horizontal distance (time) over a specified period. Higher VHF values indicate a trending market, while lower values suggest a choppy or sideways market. - Volatility Assessment:
By identifying the nature of the market (trending or choppy), the VHF helps traders assess volatility levels. This information is crucial for selecting the appropriate trading strategy, such as trend-following in a trending market or range-bound strategies in a choppy market. - Strategy Selection:
Traders use the VHF to determine whether to focus on trend-following indicators (e.g., moving averages, trendlines) or oscillators designed for ranging markets (e.g., RSI, Stochastic). The VHF acts as a filter to help choose the most effective tools for the current market condition.
Summary:
The Vertical Horizontal Filter (VHF) is a useful indicator for determining whether the market is in a trending or choppy phase. By analyzing market volatility, the VHF helps traders choose the most appropriate trading strategies based on the current market conditions.
