Introduction to RAVI

The Range Action Verification Index (RAVI) is a technical indicator developed by Tushar Chande, used primarily to identify trends and measure their strength. It is particularly useful in detecting the transition between trending and ranging markets. Unlike many momentum indicators that rely on price movements alone, RAVI utilizes a moving average-based approach to gauge market sentiment effectively.

Where:

  • SMA_short is the short-term simple moving average (often 7-period).
  • SMA_long is the long-term simple moving average (often 65-period).
  • The result is multiplied by 100 to express it as a percentage.

This formula measures the percentage difference between the short-term and long-term moving averages. A high RAVI value indicates a strong trend, while a low or negative value suggests a weak or sideways market.

How to Interpret RAVI

  • RAVI > Threshold (e.g., 3% or 4%) – A strong uptrend is present.
  • RAVI < -Threshold (e.g., -3% or -4%) – A strong downtrend is present.
  • RAVI hovering around 0% – A ranging or consolidating market.
  • Crossing the Thresholds – Signals trend initiation or reversal.

Now that we understand RAVI, let’s explore several trading strategies that incorporate this indicator.

Trading Strategies Using RAVI

1. Trend Confirmation Strategy

One of the most effective uses of RAVI is to confirm trends before entering trades.

Steps:

  1. Set up a 7-period and 65-period SMA on your chart.
  2. Calculate the RAVI indicator.
  3. Enter a buy trade when RAVI is above a set threshold (e.g., 3%), confirming an uptrend.
  4. Enter a sell trade when RAVI falls below -3%, confirming a downtrend.
  5. Place a stop-loss at a recent swing high (for short trades) or swing low (for long trades).
  6. Exit the trade when RAVI starts declining toward zero, indicating a weakening trend.

Example:

Assume RAVI crosses above 3% in EUR/USD on the daily chart. A trader enters a long position and rides the trend until RAVI starts falling back below 3%. This strategy ensures the trade aligns with strong market momentum.

2. Reversal Trading Strategy

RAVI can also help identify trend reversals, allowing traders to enter early before a new trend emerges.

Steps:

  1. Look for RAVI values that have peaked and started to decline.
  2. If RAVI has been above 4% and starts to drop below it, consider short positions.
  3. If RAVI has been below -4% and begins to rise above it, consider long positions.
  4. Confirm the reversal with a candlestick pattern (e.g., engulfing pattern, pin bar) or divergence with RSI/MACD.
  5. Place stop-loss at recent highs/lows and exit when RAVI approaches zero.

Example:

If a stock’s RAVI peaks at 6% and declines, the trader anticipates an uptrend exhaustion. A bearish engulfing candle appears, further confirming the reversal. The trader then enters a short position.

3. RAVI Breakout Strategy

Since RAVI helps distinguish trending from ranging markets, it can be used for breakout trading.

Steps:

  1. Identify a range-bound market where RAVI is below ±1%.
  2. Wait for a breakout of support or resistance levels.
  3. Enter a trade when RAVI rises above 3% (buy signal) or falls below -3% (sell signal).
  4. Confirm the breakout with volume expansion.
  5. Use trailing stops to maximize gains.

Example:

If GBP/USD trades in a tight range for weeks and RAVI stays close to 0%, a trader watches for a breakout. Once price breaks out and RAVI spikes above 3%, the trader enters a long position.

4. Divergence Strategy with RAVI and RSI

A divergence between RAVI and price can indicate a weakening trend and potential reversal.

Steps:

  1. Look for higher highs in price but lower highs in RAVI (bearish divergence).
  2. Look for lower lows in price but higher lows in RAVI (bullish divergence).
  3. Confirm the setup with RSI (Relative Strength Index) or MACD divergence.
  4. Enter trades in the direction of divergence.
  5. Place stop-loss at recent highs/lows.

Example:

If the S&P 500 forms a higher high, but RAVI forms a lower high, it signals weakening momentum. A short trade is initiated when price starts declining.

5. Scalping Strategy Using RAVI on Lower Timeframes

For short-term traders, RAVI can be used to scalp quick price movements.

Steps:

  1. Use a 3-period SMA and 21-period SMA to calculate RAVI.
  2. Look for RAVI exceeding 2% for long trades and falling below -2% for short trades.
  3. Trade only when RAVI moves strongly away from zero.
  4. Exit as soon as RAVI starts reverting.

Example:

A trader using the 5-minute chart sees RAVI rise to 2.5%, enters a long trade in Nasdaq futures, and exits as soon as RAVI starts falling below 2%.

Limitations and Precautions

  • False Signals: RAVI may generate misleading signals in low-volume markets.
  • Lagging Nature: Since RAVI is based on moving averages, it lags price movements.
  • Threshold Sensitivity: The optimal threshold (e.g., 3% vs. 4%) may vary depending on the asset and timeframe.
  • Confirmation Required: RAVI works best when combined with other indicators like RSI, MACD, or volume analysis.

Conclusion

The RAVI indicator is a powerful tool for identifying trends, reversals, and breakouts. By combining it with appropriate strategies like trend confirmation, reversals, breakouts, divergence analysis, and scalping, traders can significantly enhance their decision-making process. However, like any technical indicator, RAVI should be used alongside other forms of analysis for optimal trading success.