Relative Vigor Index (RVI) – Strategy, Rules, Returns, Video
In the ever-changing world of financial markets, technical indicators may help to make decisions quickly, and one such indicator is the Relative Vigor Index (RVI). What do you know about the indicator?
The Relative Vigor Index (RVI) is a technical analysis indicator that measures price momentum by comparing the closing price to its trading range and using a simple moving average (SMA) to smooth the result. It is based on the tendency of the price to close higher than it opens in an uptrend and lower than it opens in a downtrend.
In this post, we will take a look at the details of the relative vigor index: what it means, how to calculate it, interpret it, and use it in trading. Let’s dive in!
Key takeaways
- The Relative Vigor Index (RVI) is a technical analysis indicator that measures the momentum of price movement by comparing the closing price to its trading range and using a simple moving average (SMA) to smoothen the result.
- It is a momentum oscillator that shows the strength of a price move.
- We show you a complete RVI strategy complete with trading rules.
- If you want to look at other indicators, please read our trading indicators list.
What is the Relative Vigor Index in trading?
The Relative Vigor Index (RVI) is a technical analysis indicator that measures the momentum of price movement by comparing the closing price to its trading range and using a simple moving average (SMA) to smoothen the result. It is based on the tendency of the price to close higher than it opens in an uptrend and close lower than it opens in a downtrend.
Essentially, it is a momentum oscillator that shows the strength of a price move. It oscillates around the zero line. While the indicator rising above shows that the price momentum is rising, traders consider it a late signal and, instead, usually use the indicator-signal line crossovers, which happened earlier, to identify momentum shifts. Another important signal is the indicator’s divergences from the price swings — the RVI making a higher low when the price is making a lower low is considered a bullish signal and vice versa.
Key Insights from the Relative Vigor Index Analysis
The table below provides a concise summary of key data and statistics from the Relative Vigor Index (RVI) article, highlighting its application, performance, and key comparisons with other indicators.
| Statistic | Value |
|---|---|
| Average Gain per Trade | 0.44% |
| Total Number of Trades | 326 |
| Average Win Rate | 51% |
| Average Winner | 2.25% |
| Average Loser | 1.45% |
| Max Drawdown | 18% |
| Best Market Performance | Gold (GLD) |
| Poor Market Performance | S&P 500, Bonds (TLT) |
| Key Comparisons | MACD (momentum), RSI (momentum) |
| Best Timeframe | Daily |
| Effective Use in Crypto Trading | Yes |
The Relative Vigor Index (RVI) proves to be an insightful tool for measuring price momentum. It shows moderate success with a win rate of 51% and average gain per trade of 0.44%. While it performs well with gold, its efficacy in other markets like the S&P 500 and bonds is limited. The RVI’s strengths lie in trending markets, making it useful for various assets, including cryptocurrencies. Combining it with other indicators enhances its reliability, offering a comprehensive approach to trading.
How do you calculate the Relative Vigor Index in technical analysis?
Here is how you calculate the relative vigor index in technical analysis:
Step 1: calculate the numerator:
Numerator = [a + (2xb) + (2xc) + d]/6
Where:
b = Close – Open one bar before bar a
c = Close – Open one bar before bar b
d = Close – Open one bar before bar c
Step 2: Calculate the denominator
Denominator = [e + (2xf) + (2xg) + h]/6
Where:
f = High – Low of bar b
c = High – Low of bar c
d = High – Low of bar d
Step 3: Calculate the RVI
RVI = SMA of numerator for n periods / SMA of denominator for n periods
Where:
N = number of periods (days, weeks, hours, or minutes) selected
Step 4: Calculate the Signal Line
Signal Line = [ RVI + (2 x i) + (2 x j) + k] / 6
Where:
i = RVI value one bar prior
j = RVI value one bar before i
k = RVI value one bar before j
Relative Vigor Index (RVI) trading strategy – rules, backtest, returns, and performance
Let’s backtest an RVI trading strategy complete with trading rules.
We make the following trading rules:
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There are two conditions for when to buy and one for when to sell.
We backtest the trading rules on the gold price and use the ETF with the ticker code GLD. We get the following equity curve:
From inception until today, there have been 326 trades, and the average gain per trade is 0.44%. The average gain is high, but the win rate is moderate at 51%. The average winner is 2.25%, and the average loser is 1.45%. The max drawdown is also moderate at 18%.
All in all, these simple rules seem to work reasonably well.
Does the strategy work on other assets?
No, it doesn’t work well on the S&P 500 or bonds (TLT). However, that doesn’t mean the strategy is curve-fitted. All assets move differently!
The complete Amibroker code for the strategy:
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What do the Relative Vigor Index signal lines indicate in trading?
In trading, the Relative Vigor Index signal line simply reflects the main RVI line with a slight delay, as it is a slightly more smoothed version of the RVI line. generally, when the RVI main line, which moves faster than the signal line, crosses the signal line, it indicates a change in the momentum of the price, especially when it happens at the extreme ends of the indicator’s usual range.
Thus, if the indicator is far below the centerline and the RVI line crosses above the signal line, it indicates a shift in momentum from bearish to bullish momentum. Likewise, if the indicator is far above the centerline and the RVI line crosses below the signal line, it indicates a potential shift from bullish to bearish momentum.
When is the best time to use the Relative Vigor Index?
The best time to use the relative vigor index depends on the trader’s strategy and the market. But for the best timeframe to use for your RVI analysis, you should know that the RVI was primarily made with the daily price open and close in mind.
So, it follows that the daily timeframe would be best suited for it. But that does not mean that the indicator cannot be used on intraday timeframes. It works quite well on other timeframes. Your choice of timeframe depends on your trading style.
How can the Relative Vigor Index improve trading strategies for beginners?
The relative vigor index can improve trading strategies for beginners if they can learn how to use it effectively alongside other indicators or price action analysis. While the indicator can help them gauge the price momentum and identify emerging short-term price moves, they need to understand how the indicator works.
So, the first thing is to learn about the indicator and the next is to formulate trading strategies with it. After that, they will have to backtest the strategies to be sure they have positive expectancy before they can use them in an active market condition.
What are the key differences between the Relative Vigor Index and MACD?
The key differences between the relative vigor index and MACD are as follows:
- The RVI calculates price momentum by comparing the difference between opening prices to the closing prices to the price range over the period, while the MACD measures momentum by subtracting a long-period moving average from a shorter-period moving average and the finding the moving average of the difference.
- The RVI is often smoothened with an SMA, while the MACD is based on EMAs.
How do the Relative Vigor Index and RSI compare in momentum trading?
In momentum trading, the relative vigor index and RSI compare favorably and can both be used to spot trading opportunities in different markets. Both detect market momentum and can use divergences to signal potential reversals. But while the RSI can show overbought/oversold levels, the RVI does not show that. The RVI only oscillates around the zero centerline and does not have levels marked for overbought/oversold regions. This is why it is called a centerline oscillator. Another key difference is that the RSI reacts faster to price movements than the RVI.
Can Relative Vigor Index signals predict market reversals accurately?
Yes, the relative vigor index signal can predict market reversals accurately but not all the time. In fact, no indicator can predict market reversals accurately all the time. There are situations when the indicator gives false signals.
This is why you should never use the RVI alone as a standalone indicator — you must combine it with other indicators or price action analysis to create a robust strategy that can produce more reliable signals and also have clear risk management criteria.
What does a crossover in Relative Vigor Index lines signify?
A crossover in the relative vigor index lines signifies a shift in market momentum. However, the validity of the signal depends on the price action when it occurs and where the indicator lines are relative to the zero centerline when the crossover happens.
If the price has been declining for some time (say a pullback in an uptrend) and the indicators are far below the zero line when the crossover happens, it will signify that the downward momentum has waned and the price is about gaining some upward momentum.
Similarly, if the price has been rising for some time (say a rally in a downtrend) and the indicators are far above the zero line when the crossover happens, it will signify that the upward momentum has waned and the price is about gaining some downward momentum.
How do volume indicators complement the RVI?
Volume indicators, such as the on-balance volume, money flow index, and so on, can complement the RVI by showing the amount of trading volume behind the price momentum. While the RVI shows the price momentum, volume indicators show the volume momentum behind the price action.
For example, if the RVI shows that the price momentum has shifted from bearish to bullish, the volume indicators can show you if there is new money flowing into the market in terms of volume difference from the preceding time.
What are the limitations of using the RVI in trading?
The limitations of using the RVI in trading include:
- The indicator only works well in a trending market: The RVI works reasonably well if the market is trending and has clear reversals. Outside that, it does very badly.
- It does very poorly in a choppy flat market: In a ranging or choppy market where the price action doesn’t move in a clear direction, the RVI seems pretty useless.
- The indicator cannot tell you when the market condition will change: Unfortunately, the indicator doesn’t signal when the market condition will change. You may be doing well in a trending market and suddenly the market changes to a ranging one and the indicator starts giving poor signals without any pre-warning.
How can I set up the RVI in trading software?
You can set up the RVI in trading software by going to the indicator section of the trading platform to select the indicator and attach it to the chart of the instrument you want to analyze. On the MT4, for example, the indicator is part of the default indicators that come with the platform.
So, to set it up, you simply go to the Oscillators part of the Navigation window, select the Relative Vigor Index, and attach it to the chart. It’s that simple. See the image below:
After selecting your preferred settings and clicking ‘OK’, this is how it appears. See the image below:
What are the best settings for the RVI in day trading?
The best settings for the RVI in day trading will depend on your trading strategy — how smooth you want the indicator to be and how frequently you want the indicator to generate signals. From the image above, you can see that the default setting is 10 periods.
But that made the indicator seem choppy. You can increase the number of periods to have the indicator lines smoother, but that would also mean less frequent signals.
How does market volatility affect RVI readings?
Yes, market volatility affects RVI readings. When the is optimally volatile and trending in a particular direction, RVI readings are clearer, and the indicator lines are a lot smoother and directional. In such a situation, when the indicator shows a crossover signal or divergence, the signal is more reliable.
However, if the market is flat, with minimal volatility or extremely choppy, the indicator gives irregular signals.
Can the RVI be used for both forex and stocks?
Yes, the RVI can be used for both forex and stocks because its calculation is based on price alone, and the price data can easily be obtained for both markets.
This is unlike indicators that use volume in their calculations, which can be difficult to obtain for forex because the market has no central exchange and reliably recorded trading volume.
What are common mistakes when interpreting the RVI?
The common mistakes when interpreting the RVI include:
- The indicator shows an overbought or oversold market: The RVI is a centerline oscillator. It simply oscillates around the zero line, which is its centerline. It does not have any range limit that indicates an overbought or oversold market.
- Its signals tell you when to enter and where to exit the market: The RVI cannot be a trading strategy on its own. You have to combine it with other analysis tools to create a strategy with clear entry and exit criteria.
- It shows you how to manage risks: The indicator doesn’t show you where to place your stop-loss order or how much position to place in a trade.
How does the Relative Vigor Index behave during a trending market?
During a trending market, the Relative Vigor Index behaves in a clear manner, moving in phase with the direction of the price action. If the trend is upward, the RVI will trend upward, and if the trend is downward, the indicator will trend downward.
In such a market condition, when the RVI line crosses over the Signal line, it indicates a trend reversal. So, if an up-trending RVI crosses below the signal line, the price trend is about to reverse from bullish to bearish.
What are practical examples of using the Relative Vigor Index in trading strategies?
Here are some practical examples of using the relative vigor index in trading strategies:
Example 1: NZDUSD buy signal in an uptrend:
In the chart below, you can see the uptrend as indicated by the trendline (yellow). Notice the pullback to the trendline, which is serving as a rising support level. By the time the price reached the trendline, it created a divergence with the indicator.
Notice that the indicator has already fallen below the zero centerline before the signal crossover and the divergence. Also, notice the hammer candle at the trendline. All these support a buy signal.
Example 2: NZDUSD sell signal in a downtrend:
In the chart below, the price is in a downtrend, as shown by the downward trendline (yellow). When the price pulled back to the trendline, it was rejected, signaling a potential reversal to continue the downtrend. This was confirmed by the RVI line crossing below the signal line and also creating a small divergence along the way. A sell signal.
How do you use the RVI for entry and exit points?
You don’t use the RVI for entry and exit points unless you combine it with other analysis tools to create a reliable trading strategy where the RVI signal would confirm when it’s time to enter or exit a trade.
The strategy could be that you identify the long-term trend and enter a trade in the direction of the trend after a pullback to a key level. In this case, the RVI signal crossover can tell you when the pullback is exhausted and the next impulse wave in the trend direction is emerging.
The exit point would be when the RVI signal crosses over again, probably indicating the end of the impulse wave.
What role does the Relative Vigor Index play in swing trading?
The relative vigor index plays a key role in swing trading. It can show you when a new impulse swing is beginning so you trade in the direction of the trend. For instance, if the trend is up and the price pulls back to a key support level, you can use the RVI — the RVI line crossing over the signal line far below the zero level — to know when the price has reversed to continue with a new swing in the trend direction.
But it’s not advisable to trade with the RVI alone. Combine it with other analysis tools, such as other indicators, trendlines, chart patterns, and candlestick patterns.
Can the Relative Vigor Index be effectively used in crypto trading?
Yes, the relative vigor index can be effectively used in crypto trading, as the crypto markets are known to trend.
The RVI works well in any trending market, so it can work in crypto trading too. Many of the popular cryptocurrencies move in cycles of uptrends and downtrends — bull and bear markets. In any trend, the RVI can help you to trade the impulse swings.
How do divergences with the RVI provide trading opportunities?
Divergences with the RVI provide trading opportunities by showing when the price is losing momentum in a particular direction. When the price is making a lower low while the RVI is making a higher low, it means there is a bullish divergence which signals that the price is likely to reverse to the upside, offering an opportunity for a long trade.
Likewise, when the price is making a higher high and the RVI is making a lower high, it’s called a bearish divergence, signaling a potential reversal to the downside and an opportunity for a short trade.
What are advanced techniques involving the Relative Vigor Index?
Advanced techniques involving the relative vigor index include trading divergences and signal crossovers during a trending market. They require combining the RVI with other trading tools, including volume indicators and sentiment analysis to identify the best trading opportunities.
How do you combine the RVI with other indicators?
To combine the RVI with other indicators, you have to first understand how the indicator functions so as to know other indicators that can complement it. Some of the best indicators to combine with the RVI to create good trading strategies are moving averages, trendlines, and volume indicators.
When you combine the RVI with a long-period moving average indicator, the MA will help you identify the long-term trend, while the RVI will help you identify price reversals in the trend direction after a pullback.
What are the educational resources for learning more about the RVI?
Educational resources for learning more about the RVI would include trading blogs like the one you are reading now. Others include therobusttrader.com and quantifiedstrategies.com.