This is the third article in our Relative Vigor Index indicator series. If you haven’t already, we suggest that you check out the first article about the Relative Vigor Index Indicator. In the previous two articles, we have covered the background, the calculations involved, and how to use and read the RVI indicator. Traders generally expect the RVI to signal direction shifts and to increase in Bullish markets when momentum is on the rise and closing prices exceed opening values.
Forex traders focus on the Relative Vigor Index key points of reference, which are highpoints, lowpoints, divergences, and occasionally crossovers. As with any technical indicator, an RVI chart will never be 100% correct in the signals that it presents, but the signals are consistent enough to give a forex trader an “edge”. Skill in interpreting and understanding Relative Vigor Index indicator signals must be developed over time. In the example below, let’s develop a simple trading system based on Relative Vigor Index signals and alerts.
The following trading system is for educational purposes only. Technical analysis takes previous pricing behavior and attempts to forecast future prices, but, as we have all heard before, past results are no guarantee of future performance. With that disclaimer in mind, the “Green” circles on the above chart illustrate optimal entry and exit points for a trading strategy using RVI analysis in combination with the “divergence” noted at key decision points when Relative Vigor Index values are moving counter to pricing behavior.
A simple short-selling trading system would then be:
- Determine your entry point after the “Green” RVI line diverges from pricing behavior, and the “Red” line also crosses it in a downward fashion;
- Execute a “Sell” order for no more than 2% to 3% of your account;
- Place a stop-loss order at 20 “pips” above your entry point;
- Determine your exit point after the “Green” Relative Vigor Index peaks and after divergence completes its run when the “Red” line crosses once more.
Steps “2” and “3” represent prudent risk and money management principles that should be employed. This simple trading system would have yielded one profitable trade for 60 “pips”, but do remember that the past is no guarantee for the future. However, consistency is your objective, and hopefully, over time, Relative Vigor Index Technical Analysis will provide you with an “edge”.
That concludes our series on the Relative Vigor Index Indicator. For further reading visit our Forex indicators section.
We also recommend you to learn more about the Alligator indicator.