How to Use Relative Vigor Index (RVI) Indicator in Forex Trading

The Relative Vigor Index (RVI) indicator can provide several benefits for forex traders, including: 1. Identifying trends: The RVI can help traders identify the direction of a trend by showing bullish and bearish momentum in the price of a currency pair. 2. Identifying overbought and oversold conditions: The RVI can also help traders identify when a currency pair is overbought or oversold, which can indicate potential reversal points. 3. Identifying divergences: The RVI can help traders identify divergences between the indicator and the price of a currency pair, which can indicate a potential change in the direction of the trend. 4. Using as a confirmation tool: RVI can be used as a confirmation tool for other technical indicators or analysis such as trend lines and chart patterns, helping traders to make more informed decisions. 5. Helping to identify potential breakouts: RVI can also help traders identify potential breakouts by showing when a currency pair is moving out of a range or consolidating pattern. This article delves deep into the Relative Vigor Index (RVI) Indicator, providing an in-depth understanding of what it is, how to compute it, its integration within the MetaTrader 4 trading platform, and how to apply it in trading, accompanied by examples and step-by-step instructions to assist traders throughout the process.

What is the Relative Vigor Index (RVI) Indicator？ 

The Relative Vigor Index (RVI) is a technical analysis indicator that measures the recent price action of an asset and estimates the probability that it will continue in the short and medium term.  

The Relative Vigor Index (RVI) Indicator was introduced by Donald Dorsey in 1993 and subsequently revised by him in 1995, resulting in the version we know today. The RVI Indicator is a member of the Oscillator group of indicators, helpful in determining when markets are overbought and oversold. 

However, unlike most oscillators which focus on the high and low prices (extremes) within a certain period, the Relative Vigor Index (RVI) pays greater attention to the closing price, with respect to the opening price. 

The RVI Indicator is conceptually similar to the Relative Strength Index (RSI), but instead of comparing the magnitude of gains to losses, it compares the magnitude of closing price changes to the range of price changes over the same period. The RVI is also used to identify bullish and bearish momentum in the security price.

How does the Relative Vigor Index (RVI) Indicator Works 

The Relative Vigor Index (RVI) is a momentum oscillator that compares the closing price of a security to the range of its prices over a given period of time. It is designed to indicate the strength of a current trend by comparing the closing price to the range of prices over a certain period of time.  The principle behind the RVI Indicator is that it uses the relationship between an instruments opening and closing prices to determine whether the market is bullish or bearish. In a rising market, the closing price is typically higher than the opening price, and in a falling market, the closing price is usually lower than the opening price. The indicator assesses this relationship to gauge the overall market trend. 

The Relative Vigor Index (RVI) uses the difference between an instrument‘s closing and opening prices to determine the strength of a market trend. By analyzing this comparison in relation to the instrument’s recent price range, the RVI provides a normalized measure of the momentum behind the move.  

This information can be used to predict future market movements. In light of its ability to predict market trends, the RVI is considered a leading indicator.

The Formula for the Relative Vigor Index (RVI) Indicator 

The core step is calculating the basic RVI value using the following equation: 

RVI = (Close - Open) / (High - Low)

Where: 

• Close is the Closing Price 

• Open is the Opening Price 

• High is the Highest Price 

• Low is the Lowest Price 

RVI is calculated in a way that is suitable for identifying the ‘vigor’ (or energy) of a price during a particular period of time. 

Let‘s take a closer look at this. The RVI Indicator has two lines: Green and Red. The green line represents the RVI itself, while the red line represents the ’trigger‘ or ’signal line. An RVI line with 10 periods is the default setting, but this can be changed. When the Red line crosses above or below the RVI style line, it provides trading signals (volume-weighted moving average of the Green line). The Red line is a smoother and somewhat lagging version of the RVI moving average. 

How to calculate the RVI indicator？ 

The Relative Vigor Index (RVI) is calculated using the following steps: 

• Calculate the difference between the current periods closing price and opening price. 

• Calculate the True Range (TR) of the instrument by taking the maximum of the following values: 

• The current period‘s high minus the current period’s low 

• The absolute value of the current period‘s high minus the previous period’s close 

• The absolute value of the current period‘s low minus the previous period’s close 

• Calculate the Relative Vigor by dividing the difference between the closing and opening prices by the True Range. 

• Calculate the RVI by applying a moving average (typically a 14-period) to the Relative Vigor. 

It is important to note that there are different ways to calculate the RVI, and the formula may vary depending on the source. 

The calculation method for the Relative Vigor Index (RVI) is similar to that of the Stochastic Oscillator, a commonly used forex indicator. The Stochastic Oscillator compares price to the low of the day, while the RVI Indicator uses price in comparison to the high of the day.

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Reading the Relative Vigor Index (RVI) Indicator 

The Relative Vigor Index (RVI) Indicator oscillator typically moves above and below the middle line. RVIs centerline is zero, so both positive and negative readings are delivered by the indicator.  

• When the value is positive, the market is experiencing bullish momentum, while when it is negative, the market is experiencing bearish momentum. An RVI close to the centerline implies mainly neutral price action, with no discernible directional bias. 

• A reading that is extremely positive indicates that the market is overbought, while a reading that is extremely negative indicates that the market is oversold. It is important to watch out for cross-overs of the signal line at such readings. 

• It is also important to note that divergences between RVI and prices can also be used as a sign of a potential trend reversal. When prices make new highs while RVI is failing to confirm those highs, it may indicate a potential bearish reversal. Similarly, when prices make new lows while RVI is failing to confirm those lows, it may indicate a potential bullish reversal. 

RVI is a leading indicator, which means it can predict future market movements, but it isnt always accurate. To gain a more comprehensive understanding of the market, it should be used in conjunction with other technical indicators and analysis techniques.

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How To Use Relative Vigor Index for Forex Trading？ 

In the forex market, the open and closing prices for currencies are usually difficult to find since trading takes place 24 hours a day, five days a week. The use of the RVI Indicator may be able to assist you here. 

First, examine the chart visually to see how it is trending. The Relative Vigor Index (RVI) Indicator should be used when the market is trending, as it will provide the real signal. Once you‘ve applied the RVI, look closely at where the two lines intersect. That’s where the signal comes in. 

A crossover occurs between the RVI and the signal line of the RVI indicator. Red arrows indicate how the pair moves upward when the two indicators cross. Blue lines, on the other hand, show how the price drops when the two lines cross. The chart also shows that not every crossover results in a reversal. Thus, it is very important to use the indicator well and in combination with other indicators to confirm trends. 

Below are a few more ways Relative Vigor Index (RVI) Indicator improves efficiency in forex trading. 

Trading with RVI Indicator Signals 

The Relative Vigor Index (RVI) Indicator can deliver different kinds of trading signals to help traders execute their trading strategies. 

1. RVI as a trend-following indicator 

The Relative Vigor Index (RVI) can be used in forex trend following to confirm the direction of the trend and to generate trading signals. By following an existing trend, you can avoid being caught up in a fad. 

If the two lines are rising at the same time, hold the asset as long as it is in a bullish trend. Conversely, if your asset is falling, you should continue shorting it until the lines are on the decline. This is better illustrated in the following image. 

• Confirm the trend: Traders can use the RVI to confirm the direction of the trend. A rising RVI in an uptrend market can indicate that the trend will likely continue, while a falling RVI in a downtrend market can indicate that the trend will likely continue to fall. 

• Identify potential trend reversal: Traders can also use RVI to identify potential trend reversal. When the RVI is above 50 and starts to fall, it may indicate a potential bearish reversal. Similarly, when the RVI is below 50 and starts to rise, it may indicate a potential bullish reversal. 

• Generate trading signals: Traders can use RVI to generate trading signals. If the RVI is above 50 and starts to rise, it could be a signal to enter a long position. If the RVI is below 50 and starts to fall, it could be a signal to enter a short position. 

• Exit trades: Traders can use RVI to exit trades. If the RVI starts to fall while in a long position or starts to rise while in a short position, it could be a signal to exit the trade. 

However, this strategy has the disadvantage that at times, the price will rise while the indicator falls or moves sideways. 

2. Trading divergences using RVI Indicator 

Trading divergences with the Relative Vigor Index (RVI) Indicator is another relatively simple way to use this technical indicator.  

• During times of market divergence, the price of an underlying asset moves opposite to what the indicator indicates. The presence of divergences is usually a precursor to the reversal of a trend and serves as a signal for price exhaustion in the market.  

• Divergences may indicate that a bullish or bearish trend is about to end when they appear. Nonetheless, divergence takes a considerable amount of time to form, which poses a challenge. This makes it unsuitable for day traders and scalpers. This is illustrated better in the chart below. 

• Financial markets display both straight and hidden divergences. If the asset price is making lower lows, but the RVI is making higher lows, then there is a straight bullish divergence. Traders will place buy orders in anticipation of an upward price reversal if there is a lack of ‘vigor’ in the price.  

• A bearish divergence is also present when the RVI makes lower highs and the price makes higher highs. Traders will look for sell opportunities when a bearish divergence occurs, anticipating a downward price trend. 

Trending markets are more likely to experience hidden divergences. As the market retraces, they assist traders in choosing optimal trade entry points. For example, if the price is making a pullback in a bull market, traders will look for bullish divergences. 

3. RVI Indicator for Overbought and Oversold Conditions 

In the RVI market, these are the main types of signals traders look for. When RVI parameters are set correctly, it can alert traders to potential overbought or oversold conditions in the market. Overbought conditions are usually indicated by readings close to 0.4, whereas oversold conditions are indicated by readings close to -0.4.  

It is important to look for opportunities to place a short sale order when the market is overbought. A downward crossing of the Green and Red lines will indicate a sell signal. In the same way, buyers should purchase RVI when it is oversold. When the Green line crosses the Red line upward, it is a signal to buy.

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How to set up the RVI Indicator in MetaTrader 4？ 

Using RVI in MT4 is pretty straightforward. As one of the platform‘s standard indicators, RVI comes bundled with the platform, so you don’t have to download it separately.  

All you need to do is download MT4 and install it on your device and follow these steps: 

• Open the MetaTrader 4 platform and go to the “Navigator” window at the bottom of the screen. 

• In the “Navigator” window, click on the “Oscillators” tab and scroll down to find the “Relative Vigor Index” indicator. 

• Double-click on the “Relative Vigor Index” indicator or drag it to the chart to apply it. 

• A new window will pop up, where you can set the indicators parameters. The most commonly used settings are a 14-period moving average, but you can experiment with different periods to see what works best for you. 

• Click “OK” to apply the indicator and close the window. 

• The RVI will be displayed on the chart, typically it will be a line that oscillates between 0 and 100. 

• You can also customize the appearance of the RVI indicator by right-clicking on the chart and choosing “Properties”. In the Properties window, you can change the color, width, and style of the line. 

Under the price chart, you can see both the oscillator and the signal line. In essence, the signal line represents the main oscillator, but with a slight delay, and is a bit smoother than the main oscillator.

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Best Indicator Combinations that work well with RVI Indicator 

The Relative Vigor Index (RVI) is a leading indicator, which means that it can provide signals about future market movements. It works well when used in combination with other indicators to confirm signals and provide a more comprehensive view of the market. Here are a few indicator combinations that work well with RVI: 

• RVI and Moving Averages: RVI can be used in conjunction with moving averages to confirm trends and generate trading signals. For example, if the RVI is above 50 and the 50-period moving average is above the 100-period moving average, it could be a signal to enter a long position. 

• RVI and Two Moving Averages: RVI and two moving averages can confirm trend reversals when one crosses the other upwards or downwards based on the preceding trend. As a result of an earlier RVI signal, a new trend may be forming. Traders can place sell orders in a bull market after the faster moving average crosses the slower one, downward, indicating overbought conditions. 

• RVI and Bollinger Bands: RVI can be used in conjunction with Bollinger Bands to confirm overbought and oversold conditions and generate trading signals. For example, if the RVI is above 70 and the price is at the upper Bollinger Band, it could be a signal to enter a short position. 

• RVI and Stochastic Oscillator: RVI can be used in conjunction with the Stochastic Oscillator to confirm overbought and oversold conditions and generate trading signals. For example, if the RVI is above 70 and the Stochastic Oscillator is above 80, it could be a signal to enter a short position. 

• RVI and Relative Strength Index (RSI): RVI can be used in conjunction with the RSI to confirm overbought and oversold conditions and generate trading signals. For example, if the RVI is above 70 and the RSI is above 70, it could be a signal to enter a short position. 

It‘s important to keep in mind that indicators are not the only tools used in technical analysis and that it is important to use a combination of different indicators and methods to make trading decisions. As with any type of investment, it’s important to have a well-rounded understanding of the market and the risks involved. 

Disclaimer: This post is from Aximdaily and it is considered a marketing publication and does not constitute investment advice or research. Its content represents the general views of our editors and does not consider individual readers personal circumstances, investment experience, or current financial situation.