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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 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.
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