How to Use Relative Vigor Index in Forex

The Relative Vigor Index (RVI) is a technical analysis indicator that helps measure a trend’s strength in forex trading. It also provides traders with overbought, oversold and confirmed divergence signals. In this article, we’ll discuss the Relative Vigor Index in-depth.

 

What is the Relative Vigor Index?

The Relative Vigor Index is a momentum indicator that compares the currency pair’s closing prices to its current trading range to identify the current trend’s strengths or weaknesses. It fluctuates around a zero line.

• The upper extreme value is around +100 and indicates maximum bullish momentum signaling traders to enter long orders.
• The lower extreme value is around -100 and indicates maximum bearish momentum signaling traders to enter short orders.

When the RVI line is above zero, it indicates that bullish momentum is stronger than bearish momentum. When the RVI line falls below zero, it indicates that bearish momentum is stronger than bullish momentum. The magnitude of the RVI line indicates the strength of the trend.

This graph has been recreated from the original source. Please note this image is a representation only and is not provided as general or personal advice.

 

What trading signals does RVI deliver?

 

Divergences

Divergence in the forex market occurs when the currency pair price moves against the RVI’s price. It signals market reversals and enables you to place short orders during a current uptrend and long orders during a current downturn.

• A bullish divergence occurs when the RVI makes higher lows, but the current pair makes lower lows, signaling traders an upward trend.
• A bearish divergence occurs when the RVI makes lower highs, but the currency pair makes higher highs, signaling traders a downward potential.

 

Overbought/oversold levels

When the RVI exceeds the +100 (or desired threshold), it is considered an overbought market condition. This signals you to place short orders in the market due to a downtrend reversal expectation. On the other hand, when the RVI falls below the -100 (or desired threshold), it is considered an oversold market condition. This signals you to place long orders in the market due to an uptrend reversal expectation.

 

How to calculate RVI

The Relative Vigor Index (RVI) is calculated using the following formula: RVI = (Close - Open) / (High - Low) * V Where: C/Close: the closing price of the current period O/Open: the opening price of the current period H/High: the highest price of the current period L/Low: the lowest price of the current period V: the volume of the current period The RVI is calculated over specific periods, typically 10 or 14. After calculating the RVI values for each period, the values are smoothed with a moving average to eliminate any noise or fluctuations in the data. Let us assume you want to calculate the RVI for five periods; here is how you will do so –

• Calculate the difference between the closing and opening prices for each period (R1 = C1-C2 and so on).
• Calculate the price range for each period (H1-L1 and so on).
• Calculate the Relative Vigor Index for each period (RV1 = R1 / (H1 - L1) * V1 and so on).
• Smooth the RVI values with a moving average over five periods.

 

Top RVI trading strategies

 

1. RVI and RSI

The RVI and Relative Strength Index (RSI) are used together as a complementary indicator to identify confirmed overbought and oversold market conditions and identify potential entry and exit points. Using RVI and RSI as a strategy involves looking at convergence and divergence between the two indicators in the forex market. When both indicators move in the same direction, it indicates that the current trend is strong, and traders should place an order along with the trend. Alternatively, when the two indicators move in the opposite direction, it indicates that the current trend is weak and trading opportunities will favor the market momentum reversal.

• When the RVI line crosses the RSI line from above, it indicates a stronger bullish trend and signals traders to place a long order
• When the RVI line crosses the RSI line from below, it indicates a stronger bearish trend and signals traders to place a short order

This graph has been recreated from the original source. Please note this image is a representation only and is not provided as general or personal advice.

 

2. RVI and two moving averages

The RVI is combined with two moving averages to identify a confirmed trend and place market orders accordingly. You can plot two moving averages on the price chart, one short-term moving average and one long-term moving average. If the short-term moving average line is placed above the long-term moving average, along with the RVI line crossing the centerline from above, it indicates a confirmed bullish trend. This may indicate to traders the potential to place a long order. Conversely, if the short-term moving average line is placed below the long-term moving average line, along with the RVI line crossing the centerline from below, it indicates a confirmed bearish trend. This could be a signal for potential opportunities in the short side.

This graph has been recreated from the original source. Please note this image is a representation only and is not provided as general or personal advice.

 

3. RVI and stochastic oscillator

RVI and the stochastic oscillator are frequently used in conjunction as part of a trading strategy to confirm potential trading signals generated by one another. While the stochastic oscillator can identify potential market reversals, its primary function is to confirm trading signals generated by the RVI. You can plot the RVI and stochastic oscillator on the price chart and look for the RVI to cross above or below the centerline. The trend direction will be confirmed by the stochastic’s position on the chart. If the %K (comparison line of the lowest lows and highest highs) is above the %D (moving average of %K), it confirms a bullish trend, signaling traders to enter a long trade. If the %K line is below the %D line, it confirms a bearish trend and signals traders to enter a short trade. This strategy is also regularly used by market practitioners to identify market divergences. A bullish divergence will occur when the RVI makes a higher low but the stochastic oscillator makes a lower low signaling an uptrend reversal and indicating traders enter a long order and vice versa.

This graph has been recreated from the original source. Please note this image is a representation only and is not provided as general or personal advice.

 

Use the Relative Vigor Index to improve your forex trading strategy

The RVI indicator can be combined with several other technical analysis tools like RSI, moving average, and stochastic oscillator to identify and confirm market signals. The implementation of RVI may potentially enhance the placement of market orders and refine trading strategies. Sign up for a live trading account or try a demo account on Blueberry.