What Is the Relative Vigor Index?
The Relative Vigor Index (RVI) is a momentum indicator used in technical analysis that measures the strength of a trend by comparing a security's closing price to its trading range while smoothing the results using a simple moving average (SMA).
The RVI's usefulness is based on the observed tendency for prices to close higher than they open during uptrends, and to close lower than they open in downtrends.
- The Relative Vigor Index (RVI) is a technical momentum indicator.
- The RVI oscillates across a pre-determined center line rather than a banded trend.
- Divergences between the RVI indicator and price suggest there will be a near-term change in the trend.
The Formula for the Relative Vigor Index (RVI)
The RVI formula may look complicated, but it is really fairly intuitive:
NUMERATOR=6a+(2×b)+(2×c)+dDENOMINATOR=6e+(2×f)+(2×g)+hRVI=SMA of DENOMINATOR for N periodsSMA of NUMERATOR for N periods Signal Line =6RVI+(2×i)+(2×j)+kwhere:a=Close−Openb=Close−Open One Bar Prior to ac=Close−Open One Bar Prior to bd=Close−Open One Bar Prior to ce=High−Low of Bar af=High−Low of Bar bg=High−Low of Bar ch=High−Low of Bar di=RVI Value One Bar Priorj=RVI Value One Bar Prior to ik=RVI Value One Bar Prior to jN=Minutes/Hours/Days/Weeks/Months
How To Calculate the Relative Vigor Index (RVI)
- 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 SMAs for NUMERATOR and DENOMINATOR over the N period.
- Divide NUMERATOR value from DENOMINATOR value.
- Place the result in the signal line equation and plot it on a graph.
What Does the Relative Vigor Index (RVI) 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 RVI 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 that interpretation must be undertaken in a broad context to be actionable.
The RVI is instead a centered oscillator and not a banded (trend-following) 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 the Relative Vigor Index (RVI)
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, the 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 the Relative Vigor Index (RVI)
The RVI works best in trending markets and tends to generate false signals in rangebound markets. Results can be improved by setting longer-term lookback periods, which help to reduce the impact of whipsaws and short-term countertrends.