Definition:
The Relative Vigor Index or RVI technical indicator is based on the assumption that in a bull market the closing price will usually be higher than the opening price, and conversely in a bear market the closing price will be below the opening price.
The RVI oscillator measures the vigor, or energy, of the move as determined by where the markets finishes. The indicator can also be smoothed by a simple moving average, with 10 being a popular number of periods.
A signal line can also be computed for the RVI as a moving average of four periods on the oscillator values. This reduces price fluctuations and smoothes the curve even further.
Sample Chart:
Usage:
Perhaps the most important signal generated by the Relative Vigor Index involves a clue that the current trend is weakening based on the occurrence of divergence of the indicator with the market price action.
Bullish divergence means the RVI indicator does not make a new low even though the price does. Bearish divergence, on the other hand, occurs when the RVI does not hit a new high despite the price making one. Each of these events signals weakness in the energy of the current trend.
Furthermore, a crossover of the signal line by the RVI line once the bullish or bearish divergence becomes apparent on the chart can be used as an indicator to initiate either a long or short position. The direction depends on whether the divergence is bullish, in which case a long is taken, or bearish, which would suggest a short position.
Finally, if the overbought or oversold condition for the RVI indicator is breached in a flat market, this also provides a buy or sell signal, depending on which side the break occurs on.
Calculation Method:
Define:
- n = the number of the time period bar in question.
- High(n) = The high price traded during time period n.
- Low(n) = The low price traded during time period n.
- Open(n) = The opening price at the start of time period n.
- Close(n) = The closing price at the end of time period n.
- RVI(n) = The Relative Vigor Index value at time period n.
Calculate:
- RVI(n) = (Close(n) – Open(n)) / (High(n) – Low(n))
Practice RVI Trading
Technical analysis with RVI is a demanding skill that requires practice to master. We recommend that you use a demo account to train yourself for free before applying your skills to real money trading.
Most reputale trading platforms today (for example: GFC Trader, AVA Trader, Meta Trader) feature technical indicator functions which can be applied on real-time charts. You can open a free account, download the trading software and start sharpening your technical analysis skills today!
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