Vertical Horizontal Filter

Description

The Vertical Horizontal Filter (VHF) determines whether prices are in a trending phase or a congestion phase. The VHF compares the sum of a one period rate-of-change to the range between high and low prices over the specified period.

The age-old problem for many trading systems is their inability to determine if a trending or trading range market is at hand. Trend-following indicators such as MACD and moving averages, tend to be whipsawed as markets enter a non-trending congestion phase. On the other hand, oscillators (which work well during trading range markets) tend to overreact to price pull-backs during trending markets. The VHF indicator attempts to remedy this by measuring the "trendiness" of a market. 

MetaStock Pro prompts you to enter the number of periods to use in the calculation. The default value is 28.

Interpretation

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.