The Relative Vigor Index (RVI) is a technical indicator used in financial analysis, particularly in trading, to measure the strength of a trend and to identify potential reversals. It was developed by John Ehlers and is designed to provide a more responsive and smoother representation of price momentum compared to some other oscillators.
The RVI is calculated using the following steps:
1. Calculate the "Typical Price" for each period:
Typical Price = (Close + 2 * High + Low) / 4
2. Calculate the "1-period Rate of Change" (ROC1) for the Typical Price:
ROC1 = Typical Price - Typical Price for the previous period
3. Calculate the "Smoothed ROC1" over a specified number of periods (usually 10) using a simple moving average (SMA):
Smoothed ROC1 = SMA(ROC1, N)
Where "N" is the number of periods used for the SMA.
Here's how the Relative Vigor Index is typically interpreted and used:
1. Momentum and Trend Strength: The RVI is used to gauge the momentum and strength of a price trend. A rising RVI suggests increasing upward momentum and strength, while a falling RVI indicates increasing downward momentum and potential weakness.
2. Overbought and Oversold Conditions: Traders often use the RVI to identify overbought and oversold conditions. When the RVI crosses above a certain threshold (e.g., 1), it may indicate that the asset is overbought, suggesting a potential bearish reversal. Conversely, when the RVI crosses below the threshold, it may be considered oversold, signaling a potential bullish reversal.
3. Divergence: Like many oscillators, traders use RVI to identify divergences between the indicator and the price chart. For example, if prices are making higher highs while the RVI is making lower highs, it could signal a bearish divergence, indicating a potential trend reversal to the downside.
4. Signal Line: Some traders use a signal line, which is often set at 1 or a specific value, to generate buy and sell signals. When the RVI crosses above the signal line, it may be viewed as a bullish signal, and when it crosses below the signal line, it may be seen as a bearish signal.
As with any technical indicator, it's important to use the RVI in conjunction with other analysis tools and consider factors such as market fundamentals and risk management when making trading decisions. Additionally, traders may adjust the parameters of the RVI to better suit their trading strategies and the specific assets they are analyzing.