The “Relative Vigor Index”, or “RVI”, is a popular member of the Oscillator family of technical indicators. Although the creator of the Relative Vigor Index is unknown, its design is very similar to Stochastics, except that the closing price is compared with the Open rather than the Low price for the period. Traders generally expect the RVI to signal direction shifts and to increase in Bullish markets when momentum is on the rise and closing prices exceed opening values. Fluctuations tend to be smoother such that divergences between the index and price behaviour have more meaning.

In this article, we will explain how the RVI works and how traders can use it as one of many possible tools when interpreting market movements. We aim to explain its advantages, its history and how it is calculated, leaving you well informed about your future trading prospects.

Oscillators were some of the first technical indicators created to signify overbought and oversold conditions. Formulas may differ by design, but each indicator is trying to gauge the strength and direction of a trend by observing small divergences in how investors are reacting to current price behaviour. It is generally accepted that investors tend to overshoot their targets, but as a subset of the group diverges from the pack, warnings or alerts are triggered, which can provide an advance indication that a change in price direction is imminent.

The Relative Vigor Index indicator is classified as an oscillator since its values fluctuate between computed positive and negative values. Conceptually, trends tend to have higher closes than openings during an uptrend, and vice versa for a downtrend. The RVI indicator chart typically has a centreline at “0.00” with the RVI and its companion weighted moving average vibrating about it. High values are interpreted as a strong overbought condition, or “selling” signal, and low values as a strong oversold condition, or “buying” signal.

The Relative Vigor Index indicator is composed of two fluctuating curves – the “Green” line, which is the smoother RVI values, and the “Red” signal line. This oscillator is viewed as a “leading” indicator, in that its signals foretell that a change in trend is imminent, especially when lines cross into extreme regions or when values diverge from current pricing behaviour. The weakness in the indicator is timing and that it often gives counter-intuitive values that confuse rather than assist traders. Using an additional indicator reduces the propensity for false signals.

From a visual perspective, the Relative Vigor Index will mimic to a degree the pattern of price behaviour until it diverges. When the RVI pattern seems to be out of phase with general prices for the chosen asset, it is time for the trader to take note. Observe in the overview diagram depicted above how the RVI (Green) both follows and diverges from the candlestick action above it. When the RVI line crosses over the Red weighted moving average signal line, it is time for the trader to evaluate the potential trading opportunity that is forming.

The RVI is one of several oscillators offered on the MetaTrader4 (MT4) platform, but there are many proprietary systems that do not include it in their indicator arsenal. The popularity of the Relative Strength Index (RSI) and Stochastics, especially preferred by forex traders, may have influenced these decisions, but the RVI does offer another way to search for opportunities. It differs from most other oscillators in that there are no upper and lower regions defined within a 100% scaling. On the contrary, the RVI oscillates around a centreline zero base value.

Compared to other indicators, the Relative Vigor Index is produced by a rather complicated set of steps. Fortunately, these steps lend themselves to basic programming language, such that your trading platform software can perform the calculations instantly. The indicator is typically displayed at the bottom of the chart, and occasionally, the weighted moving average is omitted. Trading keys evolve around crossovers of the midline and divergences from the price behaviour of the asset being followed.

How good are the RVI alerts? As with any set of indicators, perfection is not a possibility. The RVI may denote a change is coming, but the timing of that change is another matter. False signals can happen, but the way to guard against too many errors is to combine forces with other favoured indicators to arrive at a complete picture. The odds improve with confirmation from other sources, preferably ones that focus on other aspects of a trend change. Hours of practice are also recommended to refine your step-by-step trading plan with the Relative Vigor Index.

HOW IS THE RELATIVE VIGOR INDEX CALCULATED?

It is believed that the RVI emanated from traders in the commodities markets, but the beauty of technical indicators is that their functionality can easily be transferred to currency pairs, stocks, and indices.

There are quite a few steps in the process, but MT4 and other trading platforms are very good at making the complex simple to the eye. Here are the formula steps:

• Choose a “look-back” period value of “N” (Standard = 14, but a default setting of “10” is often preferred on MT4).
• RVI = (Close – Open)/(High – Low) using price data for the look-back period.
• Calculate an “N” period SMA for the RVI.
• Calculate a signal line of the weighted moving average for the last four SMA values.

Colour settings are typically Green for the RVI and Red for the WMA signal line, but you can change these to other colours if it is your preference. It is also advisable to add one or two other indicators when developing a comprehensive trading strategy. To this end, the trading example near the end of this review will also include Bollinger Bands (BB) and an Average True Range (ATR) as a complementary indicator set.

It is also advisable that you practice trading with this complete set of indicators to become acquainted with the subtle clues and insights possible with this combination. All indicators are based on previous pricing behaviour, which does not necessarily predict the future, but investors have been known to move in predictable fashions and to follow the same indicators. It is this commonality that leads to repeating patterns and the ability to gain an edge in the market.