Introduction to Relative Vigor Index (RVI)
The Relative Vigor Index (RVI) is a momentum oscillator designed to measure the strength of a trend by comparing the closing price to the trading range over a set period. Unlike other oscillators like the Relative Strength Index (RSI) or Stochastic Oscillator, RVI is based on the principle that prices tend to close higher in bullish markets and lower in bearish markets.
Developed by John Ehlers, the RVI is particularly useful in determining trend direction and potential reversals. It is computed using a smoothed moving average of the difference between the close and open price, divided by the high-low range. The formula for RVI is:
Where:
- SMA = Simple Moving Average
- Close = Closing price
- Open = Opening price
- High = Highest price of the period
- Low = Lowest price of the period
The RVI consists of two lines:
- Main RVI Line: This represents the primary RVI calculation.
- Signal Line: This is usually a moving average of the RVI line to provide smoother signals.
When the RVI crosses above the signal line, it generates a bullish signal, while crossing below signals a bearish move.
Understanding RVI Signals
The RVI fluctuates around a centerline, typically at zero, and does not have fixed overbought or oversold levels like RSI or Stochastic Oscillator. Traders use the following signals to make informed decisions:
- Crossovers – When the RVI line crosses above the signal line, it suggests an uptrend, while a crossover below indicates a downtrend.
- Divergence – If prices are making new highs while RVI is failing to do so, it signals weakening momentum and a potential reversal.
- Trend Confirmation – RVI above zero confirms bullish momentum, while RVI below zero suggests bearish momentum.
Trading Strategies Using RVI
1. Basic Crossover Strategy
The simplest way to trade with RVI is to use the crossovers between the main RVI line and the signal line.
Buy Setup:
- Wait for the RVI line to cross above the signal line.
- Confirm the trend using price action or other indicators like moving averages.
- Enter a long position with a stop-loss below the recent swing low.
Sell Setup:
- Wait for the RVI line to cross below the signal line.
- Confirm the downtrend using other indicators.
- Enter a short position with a stop-loss above the recent swing high.
Example: Suppose the RVI crosses above the signal line at 50 on a stock, confirming upward momentum. A trader could enter a long position and exit when the RVI crosses back below the signal line.
2. RVI and Moving Averages Strategy
Combining RVI with a moving average helps filter false signals.
Buy Setup:
- RVI crosses above the signal line.
- The price is above a 50-period moving average.
- Enter a long trade with a stop-loss at the nearest support level.
Sell Setup:
- RVI crosses below the signal line.
- The price is below a 50-period moving average.
- Enter a short trade with a stop-loss above resistance.
Example: A trader sees the RVI crossover above the signal line while the price is above the 50-day SMA. This confirms a strong uptrend and presents a buying opportunity.
3. RVI and RSI Strategy for Trend Confirmation
RSI measures overbought/oversold conditions, while RVI confirms momentum.
Buy Setup:
- RVI crosses above the signal line.
- RSI is above 50 but below 70 (indicating bullish momentum without overbought conditions).
- Enter a long trade and exit when RSI enters the overbought zone.
Sell Setup:
- RVI crosses below the signal line.
- RSI is below 50 but above 30 (confirming bearish momentum without being oversold).
- Enter a short trade and exit when RSI hits the oversold zone.
Example: If RVI is bullish and RSI is above 50 but not overbought, it confirms a strong uptrend, making it a good time to buy.
4. RVI Divergence Strategy
Divergence between price and RVI indicates potential reversals.
Bullish Divergence:
- The price makes lower lows, but RVI makes higher lows.
- This suggests weakening downward momentum and a potential reversal.
- Buy near support levels.
Bearish Divergence:
- The price makes higher highs, but RVI makes lower highs.
- This indicates weakening bullish momentum and a potential reversal.
- Sell near resistance levels.
Example: If a stock forms higher highs but RVI trends downward, it warns of a possible reversal, making it a good point to exit or short the trade.
5. RVI with Bollinger Bands for Volatility-Based Trading
Bollinger Bands measure volatility, and combining them with RVI helps time entries and exits.
Buy Setup:
- RVI crosses above the signal line.
- Price touches or moves near the lower Bollinger Band.
- Enter a long trade and exit when price reaches the upper band.
Sell Setup:
- RVI crosses below the signal line.
- Price touches or moves near the upper Bollinger Band.
- Enter a short trade and exit when price reaches the lower band.
Example: If a stock’s price is near the lower Bollinger Band and RVI gives a bullish crossover, it signals a buying opportunity.
Conclusion
The Relative Vigor Index (RVI) is a powerful momentum oscillator that traders can use to identify trend direction, reversals, and trade confirmations. By itself, it provides useful insights, but its effectiveness increases when combined with other indicators like moving averages, RSI, Bollinger Bands, and divergence analysis.
Traders should always use stop-loss strategies and risk management techniques when trading RVI-based setups. Backtesting different strategies and integrating them with broader market analysis will help improve accuracy and profitability.
By understanding and applying these RVI strategies, traders can make more informed decisions and optimize their trading approach.