Introduction
The Vertical Horizontal Filter ("VHF") determines
whether prices are in a trending phase or a congestion phase.
The VHF was first presented by Adam White in an article
published in the August, 1991 issue of Futures Magazine.
Probably the biggest dilemma in technical analysis is
determining if prices are trending or are in a tradingrange. Trendfollowing indicators
such as the MACD and moving averages are excellent in trending markets, but they usually
generate multiple conflicting trades during tradingrange (or "congestion")
periods. On the other hand, oscillators such as the RSI and Stochastics work well when
prices fluctuate within a trading range, but they almost always close positions
prematurely during trending markets. The VHF indicator attempts to determine the
"trendiness" of prices to help you decide which indicators to use.
There are three ways to interpret the VHF indicator:
 You can use the VHF values themselves to determine the
degree that prices are trending. The higher the VHF, the higher the degree of trending and
the more you should be using trendfollowing indicators.
 You can use the direction of the VHF 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.
 You can use the VHF as a contrarian indicator. Expect
congestion periods to follow high VHF values; expect prices to trend following low VHF
values.
The following chart shows a chart and the VHF indicator:
To calculate the VHF indicator, first determine the
highest closing price ("HCP") and the lowest closing price ("LCP")
over the specified time period (often 28days).
Next, subtract the lowest closing price from the highest
closing price and take the absolute value of this difference. This value will be the
numerator.
To determine the denominator, sum the absolute value of
the difference between each day's price and the previous day's price over the specified
time periods.
The VHF is then calculated by dividing the previously
defined numerator by the denominator.
