Let’s consider a simple and understandable for everyone, but useful and effective indicator – Relative Vigor Index. After spending just 3 minutes of time, you will learn how to determine the strength of the current trend and find pivot points. Read Hurry!
The RVI indicator belongs to the class of oscillators. It measures the potential of the current price movement to maintain its direction, or reverse.
This is based on the principle that in a growing market, closing prices are expected to be above than the opening prices. Well, in a falling market, on the contrary – the closing prices will be mainly below opening prices. This, by the way, is the definition of a trend in technical analysis – when the closing prices are higher than the opening prices, this is an uptrend, but for a downtrend, it is the opposite. So that RVI just illustrates this fundamental principle in a visual form, in a simple line, which is very convenient.
So, in essence, the RVI indicator tries to determine whether the market sentiment is bullish or bearish by comparing the closing and opening prices. Then the indicator compares this data with the recent price range and gives us the averaged information in the form of a line in the indicator window. The essence of these readings is to determine whether the current movement has potential for further development or we should expect a reversal (or maybe a transition to flat). Or, in other words, to determine how strong the current trend is and whether it is preparing to end.
Formula and calculation method
I don’t think it’s very important to know, except for general development. Fortunately, in trading, we do not need to sit and calculate something using a formula, but for those who are especially curious, here it is:
RVI = (close-open)/(high-low)
The results are then averaged using a moving average. This concludes with the formulas.
Setting up the RVI indicator
The only key parameter here is Period which by default is 10… This period is selected empirically for each currency pair and timeframe separately, just by brute force. You must ensure that the indicator highs coincide with the price highs on the chart. For starters, leave 10 and see what happens. It is very likely that the result will be quite satisfactory and you will not want to change anything.
Something like that, as shown in the screenshot. The extrema of the indicator coincide with the extrema on the chart. This is a daily chart USDCAD, setting RVI period here is equal 5.
In the tab Levels, you can add some significant levels to the indicator window, possibly by analogy with the overbought-oversold levels of the stochastic.
How to read indicator readings and their signals
To receive a trading signal, we need:
- The green line of the indicator was in the upper (for a bullish trend) or lower (for a bearish) area of the indicator window. The top area is above zero, the bottom is below zero. Moreover, the closer to the extremes (the higher or lower), the better.
- Next, you need to wait for the red line to cross the green one.
Please note that when the indicator lines cross at the zero mark or very close to it, then it is better to miss such a signal.
And that’s it… I will add that:
- If a green Line indicator is in the upper area, crossed by Redline and now red is over green – this is a signal of the end of a bullish trend and entry into sales.
- And vice versa, if the green line is at the bottom and they intersect with the red line so that now the green line is above the red – this is a signal to buy.
As you can see, nothing complicated. Take a look at the graph and you will understand everything.
As well as absolutely any indicator, the Relative Vigor Index will sometimes give false signals. And like any indicator, it requires additional confirmation signals… You can’t just pick up and enter the market on a signal from just one indicator.
Therefore, for full-fledged and profitable trading, it is necessary to combine RVI with other indicators or techniques of technical analysis. For example – with Japanese price patterns… I’ll show you an example of work now.
Looking at the screenshot, we see the Hammer signal. As we know, this is a bearish trend reversal signal. We look at the RVI indicator window and see that it also gives us a buy signal! This means that both signals speak for one thing – it’s time to buy. The signals confirm each other. We enter the purchases, set the stop loss for the nearest local minimum (in this case, the tail of the Hammer candlestick), set the take profit at our discretion – either multiply the stop loss by 2 or 3, or set it at the nearest strong support-resistance level (read how to find them be sure to follow the link) and sit on the priest exactly in anticipation of profit.
No magic, it’s simple! I recommend that you subscribe to our newsletter – at the bottom of the post, then join the VK public in order to also be aware of all the news, including daily Forex analytics and surf the site, read something else. There are many interesting things!