The Relative Vigor Index (RVI) is a technical indicator used in trading to measure the strength of a trend by comparing the closing price to the daily range. The underlying principle is that during an upward trend, the closing price tends to be higher than the opening price, and conversely, during a downward trend, the closing price tends to be lower than the opening price.
Formula of the Relative Vigor Index
Calculating the RVI
The RVI is calculated using the following formulas:
Where:
- \(\text{Close}\) is the closing price of the period.
- \(\text{Open}\) is the opening price of the period.
- \(\text{High}\) is the highest price of the period.
- \(\text{Low}\) is the lowest price of the period.
- \(n\) is the number of periods.
Smoothing the RVI
To smooth out the price fluctuations, a signal line (usually a Simple Moving Average - SMA) of the RVI can be calculated. The formula for a 4-period SMA of the RVI is:
Applications of the RVI in Trading
Identifying Trends
Traders employ the RVI to determine the direction and strength of market trends. A rising RVI suggests a strong upward trend, while a falling RVI indicates a downward trend. This helps traders make informed decisions on entering or exiting trades.
Divergence Analysis
One of the key uses of the RVI is to detect divergences between the RVI and the price movement. A bullish divergence occurs when the price makes a new low, but the RVI does not follow suit. Conversely, a bearish divergence happens when the price makes a new high, but the RVI does not.
Confirming Signals
The RVI is often used in conjunction with other technical indicators to confirm trading signals. For example, traders might use the RVI along with the Relative Strength Index (RSI) or Moving Average Convergence Divergence (MACD) to validate trend direction and strength.
Historical Context and Development
The RVI was developed by John Ehlers, a notable figure in the field of technical analysis. Ehlers introduced the RVI to the trading community as a way to refine the accuracy of identifying trends by focusing on the relationship between closing prices and the overall price range within a trading period.
Practical Example
Example Calculation
Assume the following for a 4-period calculation:
- Period 1: Open = 50, Close = 52, High = 53, Low = 49
- Period 2: Open = 52, Close = 51, High = 54, Low = 50
- Period 3: Open = 51, Close = 53, High = 55, Low = 51
- Period 4: Open = 53, Close = 54, High = 56, Low = 52
Step-by-Step Calculation:
-
Calculate the daily RVI values:
$$ \text{Period 1 RVI} = \frac{52 - 50}{53 - 49} = 0.5 $$$$ \text{Period 2 RVI} = \frac{51 - 52}{54 - 50} = -0.25 $$$$ \text{Period 3 RVI} = \frac{53 - 51}{55 - 51} = 0.5 $$$$ \text{Period 4 RVI} = \frac{54 - 53}{56 - 52} = 0.25 $$ -
Calculate the 4-period RVI:
$$ \text{4-Period RVI} = \frac{0.5 - 0.25 + 0.5 + 0.25}{4} = 0.25 $$ -
Smooth the RVI using a 4-period SMA:
$$ \text{SMA of RVI} = \frac{0.5 + (-0.25) + 0.5 + 0.25}{4} = 0.25 $$
FAQs
What is the main difference between the RVI and RSI?
Can the RVI be used for all types of markets?
How does the RVI compare to other oscillators?
Conclusion
The Relative Vigor Index (RVI) is an essential technical indicator for traders seeking to capture the underlying strength of market trends. By comparing the closing price to the daily range, the RVI offers a nuanced view of market momentum, helping traders make informed decisions. Its ability to smooth out price fluctuations further enhances its reliability, making it a valuable addition to any trading strategy.
References
- Ehlers, J. F. (2001). Rocket Science for Traders: Digital Signal Processing Applications. John Wiley & Sons, Inc.
- Murphy, J. J. (1999). Technical Analysis of the Financial Markets: A Comprehensive Guide to Trading Methods and Applications. New York Institute of Finance.
- Wilder, J. W. (1978). New Concepts in Technical Trading Systems. Trend Research.
