Vertical Horizontal Filter

The Vertical Horizontal Filter (or VHF) is used to determine whether the market is in a trend or in a congestion phase. This indicator was first presented by Adam White in an article published in August 1991 in Futures Magazine.

The VHF is calculated by dividing the difference between the highs and the lows over a given period by the sum of the absolute values of the daily differences in closing prices.

Typically, a period of 28 is used for the VHF.

Example

Interpretation

The VHF determines the strength of the trend. The higher it is, the clearer the trend.

There are three ways to interpret this indicator:

• Use the VHF value to determine the degree of trend strength. The higher the VHF, the greater the degree, and one can then use trend-following indicators.
• Use the direction of the VHF to determine if a trending or congestion phase is developing. A rising VHF indicates the beginning of a trend. Conversely, a falling VHF indicates an instrument likely to enter a congestion phase.
• Use the method of contrarians. When the VHF reaches a peak, it can be assumed that the trend will stop and the instrument will enter a congestion phase. Conversely, when the VHF reaches a minimum, it can be assumed that the congestion period will end and the trend will restart.