Vertical Horizontal Filter (VHF) was created by Adam White to identify trending and ranging markets. VHF attempts to measure the level of trend activity, similar to ADX in the Directional Movement System. Trend indicators can then be employed in trending markets and momentum indicators in ranging markets.
Vary the number of periods in the VHF to suit different time frames. White originally recommended 28 days, but also recommends an 18-day window smoothed with a 6-day moving average.
There are three ways to use the VHF indicator:
First, VHF values above or below certain levels indicate the degree of trending. The higher the VHF, the higher the degree of trending.
Second, the direction of the VHF can be used to determine whether a trending or congestion phase (flat period) is developing. Rising VHF indicates a developing trend; falling VHF indicates that prices may be entering a congestion phase.
Finally, the VHF can be used as a contrarian type indicator. Expect congestion to follow high VHF values. Low VHF values may indicate a trending phase will soon follow.