The Two Pole Butterworth filter is a VertexFX Indicator which uses smoothing method termed as low-pass filters to reduce the lag between the current price and the moving average.
It uses the current price, previous price and smoothing period. Low-pass filters are used in signal processing to eliminate noise and improve signal to noise ratio. In trading, it is used to reduce (or normalize) the impact of fluctuations of price on the moving averages and to reduce the lag.
The "number of poles" is the degree of the low-pass filter. The smoothed price generated by the Two Pole Butterworth filter can be used to determine the current trend of the market. Compared to the various moving averages, the Two Pole Butterworth Filter is smoother and exhibits shorter lag. Typically when the price is above the TPBF (blue), the market is considerd in bullish trend wherease when the price is below the TPBF (red), the market is considered in a bearish trend.