All trading system which follows trends, gives numerous false trading signals during the period of sideways market. If we can remove false trading signal from trading system with reasonable accuracy then we can turn any trend following trading system in a most profitable and reliable trading system.
The Vertical Horizontal Filter Indicator
In this post I will show you an indicator which will be useful to identify the period of false market signals. The indicator is Vertical horizontal filter in short VHF.
The VHF indicator measure wether the price is going horizontal (non-directional) or vertical (uni-directional), no indicator in technical analysis has this capacity.
So the indicator is designed to filter vertical (trending) move from horizontal (sideway) move. So it has the primary aim of filtering types of price movement.
How To Use The VHF Indicator
The indicator consist of only one simple line below price chart. There are only two main indication given by the indicator as follow:
- If the indicator value is high, it suggest a trending market and low value suggest sideway market
- If it is rising it suggest that the market will start the trend soon. And conversely the falling value suggests that the market is becoming calmer and going to be sideways.
How To Filter False Trading Signals
Very simple from the above rules. Just avoid any buy or short signals of your system when the indicator value is lower and also going lower. Because as listed above low value indicates sideway markets and the lowering value suggest still more horizontal moves to come. So any signal would not give you any profit.
The Best Signal Of VHF Indicator
The best entry point in any stock or market is when it is about to trend in one direction. This point is very correctly identified with VHF indicator. This entry point gives best trading signal which can make you multifold profit.
When the indicator reaches its lowest value (indicated as green line in charts), keep making new lows. Now when the indicator starts rising at the first occasion, that provides best entry point in the very start of coming trend. This is the best signal of this indicator. The examples of this can be readily seen in the feature image.
For more examples and understanding watch the following video.