The Relative Vigor Index (RVI) is a technical indicator used in financial markets to measure the strength and direction of a price trend. It is primarily used to identify potential trend reversals or confirm the strength of an ongoing trend. The RVI combines price and volume data to generate trading signals and is commonly applied in the analysis of stocks, currencies, commodities, and other financial instruments.
Here’s how the Relative Vigor Index works:
Calculation: The RVI is calculated using four components: closing price, opening price, high price, and low price. It compares the relationship between the closing price and the range between the high and low prices. The formula for RVI calculation involves a smoothing period and is typically represented as a ratio or oscillator.
Interpretation: The RVI oscillates around a centerline, usually set at 0. Traders look for signals based on the RVI crossing above or below this centerline, as well as divergences between the RVI and price movements. When the RVI crosses above the centerline, it suggests increasing bullish momentum, while a cross below the centerline indicates increasing bearish momentum.
Signal Confirmation: Traders often use additional indicators or chart patterns to confirm RVI signals. For example, they may look for support or resistance levels, trendlines, or other technical indicators to validate potential trade entries or exits based on RVI signals.
Divergence Analysis: One notable feature of the RVI is its ability to detect divergences. Divergence occurs when the RVI and the price of the asset move in opposite directions. Bullish divergence happens when the price makes a lower low while the RVI makes a higher low, indicating potential bullish momentum. Conversely, bearish divergence occurs when the price makes a higher high while the RVI makes a lower high, signaling potential bearish momentum.
