Relative Vigor Index Indicator Explained

Definition of the Relative Vigor Index (RVI)

The Relative Vigor Index (RVI) is very similar to another oscillator (the Stochastics indicator), with the exception that the RVI works by using the opening price as well as the closing price of the asset in its calculation, as opposed to the Stochastics oscillator which compares closing price and lowest price of the asset for the time period under review. The RVI is classified as a momentum oscillator.

relative_vigor_index

The RVI values increase in bull markets as a result of increasing momentum while values decrease in bear markets where closing prices are lower than opening prices. The values are not calibrated from 0 to 100 like the Stochastics, but rather are expressed as computed positive and negative figures. There is centerline marked 0.00 which serves as the reference point for values that are positive and negative. Highly positive values are overbought, while highly negative values are oversold.

Components of the Relative Vigor Index

The Relative Vigor Index indicator is made up of two lines which are curvy and fluctuate as price action fluctuates, just like those of the Stochastics oscillator. These are:

  1. The “Green” RVI smoothing line.
  2. The signal line (red in colour by default).

The RVI uses the 10-period SMA as its smoothing line. The signal line is a 4-period weighted moving average of the RVI The concurrence of lines serves as a signal to buy or to sell.

Usage of Indicator

The Relative Vigor Index shares resemblance to the Stochastics oscillator, so it can be used in the ways the Stochastics oscillator is used. The Relative Vigor Index is able to predict price changes before those changes actually happen, thus making it a leading indicator. It can therefore be used as a signal for trend reversal, usually as a result of these lines crossing into the extreme areas (overbought and oversold areas). In this situation, it can be used with a lagging indicator to balance out any attempts at producing hasty signals which may eventually turn out to be wrong. The RVI can also show divergence changes.

Indicator Settings

The indicator is listed on the MT4 as an oscillator indicator. To attach it to the MT4 chart, click on Insert -> Indicators -> Oscillators->Relative Vigor Index

RVI

The indicator lines of the Relative Vigor Index indicator can be enhanced by either increasing the line thickness or by changing the colour of the indicator lines to make them more visible. The period can also be adjusted, but it is best to leave it at the default settings of 10.

Usage of the Relative Vigor Index in Forex Trading

The Relative Vigor Index can be used in forex trading in the following ways.

1) As a standalone indicator

When used as a standalone indicator, the Relative Vigor Index can be used in divergence trades. The divergence in this case would be to look to see where the peaks and troughs of price action deviate from the peaks and troughs of the Relative Vigor Index. Trend lines are used to connect the peaks and troughs of both price action and the Relative Vigor Index. Whenever a divergence is detected, it represents a trading opportunity as price action will try to correct the divergence. The divergence situation is seen when the trend lines of price and the RVI are facing different directions. The entry for any divergence trade must be made using technical parameters such as candlestick or chart patterns.

RVI_diverg

The example above shows a typical divergence trade. The Relative Vigor Index is showing lower highs while the price action is making higher highs. This is a bearish divergence and price is expected to correct downwards to tally with the RVI. After identifying the divergence, the trade is setup after we identify a technical basis for a short entry. The exit point of this trade is when price gets to levels identified by the RVI indicator as being in oversold territory. In this example, the move was helped by negative market news for the British Pound: who will complain, if the move supports the technical play? Simply ride the move and bank your pips.

2) In combination with other indicators

The primary way is to trade the RVI in combination with other indicators is when trading overbought or oversold market conditions. Here, it is best to use the coloured MACD indicator along with it.

RVI_long

The daily chart here shows a falling wedge, with the breakout to the upside occurring when the RVI lines are above zero, showing upside momentum. The coloured MACD indicator (not shown here) with a blue colour on its bars, would confirm the long trade entry. The exit point of the trade is when the RVI enters overbought territory, or when the histogram bars of the coloured MACD indicator shows a red colour.

Conclusion

Make sure you practice how to trade each setup on a demo account before using the indicator to trade real money. Also pay attention to risk management.

Leave a Reply