The “Relative Vigor Index”, or “RVI”, is a popular member of the “Oscillator” family of technical indicators. Although the creator of the Relative Vigor Index is unknown, its design is very similar to Stochastics except that the closing price is compared with the Open rather than the Low price for the period. 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. Fluctuations tend to be smoother such that divergences between the index and price behavior have more meaning.
The Relative Vigor Index indicator is classified as an “oscillator” since the values fluctuate between computed positive and negative values. The indicator chart typically has a centerline at “0.00” with the RVI and its companion weighted moving average vibrating about it. High values are interpreted as a strong overbought condition, or “selling” signal, and low values, a strong oversold condition, or “buying” signal.
Relative Vigor Index Formula
The Relative Vigor Index indicator is common on Metatrader4 trading software, and the calculation formula sequence involves these straightforward steps:
- Choose a period value of “N” (Standard = 14, but “10” is preferred);
- RVI = (Close – Open)/(High – Low) using price data for the period;
- Calculate an “N” period SMA for the RVI;
- Calculate a signal line of the weighted moving average for last four values.
Software programs perform the necessary computational work and produce a Relative Vigor Index indicator as displayed by the two lines as in of the following chart:
The Relative Vigor Index indicator is composed of two fluctuating curves – the “Green” line, which is the smoother RVI values, and the “Red” signal line. The Relative Vigor Index oscillator is viewed as a “leading” indicator, in that its signals foretell that a change in trend is imminent, especially when lines cross into extreme regions or when values diverge from current pricing behavior. The weakness in the indicator is timing and that it often gives counter-intuitive values that confuse rather than assist traders. Using an additional indicator may reduce the propensity for false signals.
The next article in this series on the Relative Vigor Index indicator will discuss how this oscillator is used in forex trading and how to read the various graphical signals that are generated.
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