Table of Contents
- What Is the Relative Vigor Index?
- The Formula for the Relative Vigor Index (RVI)
- How To Calculate the Relative Vigor Index (RVI)
- What Does the Relative Vigor Index (RVI) Tell You?
- Example of How To Use the Relative Vigor Index (RVI)
- What Is Technical Analysis in Trading?
- Is the Relative Vigor Index a Leading or Lagging Indicator?
- What Type of Indicator is the Relative Vigor Index?
- The Bottom Line
What Is the Relative Vigor Index?
Let me explain the Relative Vigor Index (RVI) to you directly: it's a momentum indicator in technical analysis that gauges the strength of a trend by comparing a security's closing price to its trading range, then smoothing those results with a simple moving average (SMA).
You should know that the RVI's value comes from the pattern where prices tend to close higher than they open in uptrends, and lower in downtrends.
Key Takeaways
- The Relative Vigor Index (RVI) is a technical momentum indicator.
- The RVI uses a simple moving average to smooth out price fluctuations, allowing traders to more easily identify trends.
- The RVI oscillates across a pre-determined center line rather than a banded trend.
- Divergences between the RVI indicator and price suggest there will be a near-term change in the trend.
- The RVI is most useful in trending markets. In rangebound markets, it risks generating false signals.
The Formula for the Relative Vigor Index (RVI)
The RVI formula might seem complex at first glance, but I'll break it down for you—it's actually quite intuitive once you see it.
Here's how it works: NUMERATOR = (a + (2 × b) + (2 × c) + d) / 6, DENOMINATOR = (e + (2 × f) + (2 × g) + h) / 6, RVI = SMA of NUMERATOR for N periods / SMA of DENOMINATOR for N periods, Signal Line = (RVI + (2 × i) + (2 × j) + k) / 6.
Where: a = Close - Open, b = Close - Open One Bar Prior to a, c = Close - Open One Bar Prior to b, d = Close - Open One Bar Prior to c, e = High - Low of Bar a, f = High - Low of Bar b, g = High - Low of Bar c, h = High - Low of Bar d, i = RVI Value One Bar Prior, j = RVI Value One Bar Prior to i, k = RVI Value One Bar Prior to j, N = Minutes/Hours/Days/Weeks/Months.
How To Calculate the Relative Vigor Index (RVI)
To calculate the RVI, start by choosing an N period to examine.
Identify the open, high, low, and close values for the current bar, and do the same for lookback periods prior to the current bar.
Then calculate SMAs for the NUMERATOR and DENOMINATOR over the N period, divide the NUMERATOR value by the DENOMINATOR value, and place the result in the signal line equation to plot it on a graph.
What Does the Relative Vigor Index (RVI) Tell You?
The RVI is calculated similarly to the stochastics oscillator, but it compares the close relative to the open instead of the low—traders expect the RVI to rise as a bullish trend builds momentum, with closing prices at the top of the range and opens near the low.
You interpret the RVI like other oscillators such as MACD or RSI; it can stay at extremes for a while, so consider the broader context for actionable insights.
As a centered oscillator, the RVI is displayed around a center line above or below the price chart—combine it with other technical analysis for the best results.
Example of How To Use the Relative Vigor Index (RVI)
You can use the RVI to spot potential trend changes by looking for divergences with the current price, then identify entry and exit points with trendlines and chart patterns.
The two main trading signals are RVI Divergences, where divergence suggests a near-term trend change in the RVI's direction, and RVI Crossovers, where crossing above the signal line is bullish and below is bearish—these act as leading indicators.
Remember, the RVI performs best in trending markets; in rangebound ones, it can give false signals, so use longer lookback periods to minimize whipsaws.
What Is Technical Analysis in Trading?
Technical analysis is a strategy that evaluates trends using statistical data on price and volume to make trading decisions, focusing on how trends might change—unlike fundamental analysis, which looks at the underlying company's data.
Is the Relative Vigor Index a Leading or Lagging Indicator?
The RVI is a leading indicator, meaning it shifts before the trend does, signaling future changes when it diverges from the asset's price behavior.
What Type of Indicator is the Relative Vigor Index?
The RVI is a momentum indicator, which are leading types that assess the speed of price changes; other indicators include trend (lagging), mean reversion (lagging), relative strength (leading), and volume (leading or lagging).
The Bottom Line
In summary, the Relative Vigor Index (RVI) is a momentum indicator for technical analysis that uses SMA to smooth price fluctuations and spot trends.
Divergences between RVI and price point to likely trend changes, making it useful in trending markets but risky for false signals in rangebound ones.
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