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RVI

What is the Relative Vigor Index?

The Relative Vigor Index (RVI or RVGI) is a technical indicator, which anticipates changes in market trends. Many day traders consider the RVI a "first cousin" of the Stochastic Oscillator due to the similarities in their formulas (both use the open, close, high and low of each candlestick).

Since the Relative Vigor Index indicator is an oscillator, the indicator bounces above and below zero – producing both positive and negative values. The below image displays the two lines which make up the RVI indicator:

Relative Vigor Index

The Relative Vigor Index formula is as follows: RVI = (Close – Open) / (High – Low) for each period.

You may be thinking, “But wait! How do I calculate these two lines?”

Green Line

The green line is a standard simple moving average of the Relative Vigor Index calculation. Although you can adjust the green line, the default value is 10-periods.

Red line

The red line is a 4-period volume weighted moving average. The red line is the "trigger line", because it provides trade signals when it crosses above or below the green line.

Types of RVI Trade Signals

Overbought/Oversold market

A low value indicates an oversold market and a high value signals an overbought one.

Crossovers

Entry and exit signals are triggered when the short moving average crosses the long moving average.

Divergence

Divergences between price action and RVI often lead counter trend moves.

Chart Patterns

The RVI can plot formations such as double bottoms, double tops, head and shoulders, etc.

The picture below, illustrates a double bottom formation of the RVI indicator:

RVI Double Bottom

This is a 10-minute chart of Facebook from October 27-29, 2015, where the Relative Vigor Index develops into a clear double bottom signal. After creating the "W" bottom, Facebook's price took off!

Like every other indicator, the RVI can produce a number of false signals. Therefore, I strongly suggest you combine the Relative Vigor Index with additional trading tools to identify head fakes.

To address the risk of false signals, we will now cover 5 day trading strategies using the RVI indicator.

5 Trading Strategies using the RVI

1 - Relative Vigor Index and the Stochastic Oscillator

2 - Relative Vigor Index and the Relative Strength Index (RSI)

3 - Relative Vigor Index and Two Moving Averages

4 - Relative Vigor Index and the Moving Average Convergence Divergence (MACD)

5 - Relative Vigor Index and Bollinger Bands

Comparing the 5 Strategies

Strategies using the Stochastics and RSI will provide similar trading signals as both are oscillators. It's better to focus your attention towards on-chart indicators, as these interact directly with the price action.

To this point, while the MACD is not an oscillator, it stifles the effectiveness of the RVI indicator. By the time the MACD provides a trade signal, the buying opportunity is gone.

The Bollinger Band strategy will produce many signals as stocks will often cross above and below the 20-period moving average. As a trader, avoiding over doing it is always a great idea.

Therefore, out of the 5 strategies, I would have to say the RVI with two moving averages is the best for day trading.

The moving averages allow you to assess the price action while the RVI gives you an indication of oversold and overbought conditions. This way you need actual price action to confirm the signal from the RVI oscillator.

Conclusion

The RVI is a leading indicator.
The RVI consists of two lines, which interact with each other and fluctuate around a zero level.
The RVI gives signals for overbought and oversold conditions.
The RVI creates divergences and chart patterns.
An additional trading indicator should always confirm RVI signals.
You should combine the RVI with other indicators:
- Stochastic Oscillator
- Relative Strength Index (RSI)
- Two Moving Averages (Recommended)
- Moving Average Convergence Divergence (MACD)
- Bollinger Bands.

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