What is the Relative Vigor Index?
The Relative Vigor Index (RVI) is a technical analysis indicator that measures the strength of a trend by comparing a security's closing price to its trading range and smoothing the results. It's based on the tendency for prices to close higher than they open in uptrends and to close lower than they open in downtrends.
- RVI oscillates across a center line rather than trend, higher or lower.
- Divergences between the RVI indicator and price suggests there will be a near-term change in the trend
The Formula for Relative Vigor Index is:
a = Close – Open
b = Close – Open one bar prior to a
c = Close – Open one bar prior to b
d = Close – Open one bar prior to c
e = High – Low of bar a
f = High – Low of bar b
g = High – Low of bar c
h = High – Low of bar d
i = RVI value one bar prior
j = RVI value one bar prior to i
k = RVI value one bar prior to j
N = minutes/hours/days/weeks/months
How To Calculate Relative Vigor Index
- Choose an N period to examine.
- Identify the Open, High, Low and Close values for the current bar.
- Identify the Open, High, Low and Close values for lookback periods prior to the current bar.
- Calculate simple moving averages for NUMERATOR and DENOMINATOR over the N period.
- Divide NUMERATOR value from DENOMINATOR value.
- Place the result in the Signal Line equation and plot on a graph.
What Does Relative Vigor Index Tell You?
The RVI indicator is calculated in a similar fashion to the stochastics oscillator but it compares the close relative to the open rather than comparing the close relative to the low. Traders expect the RVI value to rise as the bullish trend gains momentum because, in this positive setting, a security's closing price tends to be at the top of the range while the open is near the low of the range.
The relative vigor index is interpreted in the same way as many other oscillators, such as moving average convergence-divergence (MACD) or the relative strength index (RSI). While oscillators tend to fluctuate between set levels, they may remain at extreme levels over a prolonged period of time so interpretation must be undertaken in a broad context to be actionable.
The RVI is a centered oscillator rather than a banded oscillator, which means that it's typically displayed above or below the price chart, moving around a center line rather than the actual price. It's a good idea to use the RVI indicator in conjunction with other forms of technical analysis in order to find the highest probability outcomes.
Example of How To Use Relative Vigor Index
For example, a trader might examine potential changes in a trend with the RVI indicator by looking for divergences with the current price and then identifying specific entry and exit points with traditional trendlines and chart patterns.
The two most popular trading signals include:
- RVI Divergences - Divergence between the RVI indicator and price suggests there will be a near-term change in the trend in the direction of the RVI's trend. So, if a stock price is rising and the RVI indicator is falling, it predicts the stock will reverse over the near-term.
- RVI Crossovers - Like many oscillators, RVI has a signal line that's often calculated with price inputs. A crossover above the signal line is a bullish indicator while a crossover below the signal line is a bearish indicator. These crossovers are designed to be leading indicators of future price direction.
Limitations of Using Relative Vigor Index
Relative Vigor Index works best in trending markets while generating false signals in rangebound markets. Improve results by setting longer-term lookback periods, in order to reduce the impact of whipsaws and short-term countertrends.