Relative Vigor Index (RVI) – is the oscillator used for technical analysis in Forex. An author of this index is John Enlers known for application of cycles in technical analysis of the market. The first time Relative Vigor Index was mentioned in Stocks and Commodities magazine in 2002. In this article author says that during growth close price of bar is higher than open price and the opposite tendency was observed by him in descending market. RVI index is built on the basis of this statement.
Formula of Relative Vigor Index
Since the indicator is similar to another Stochastic oscillator, calculation formula of both is similar. However, to measure RVI, it is required to compare close level and open level of candle. To put it simple, RVI renders actual change of quotes for a certain period of time.
Close – close price of bar;
Open – open price of bar;
High – highest price of bar;
Low – lowest price of bar.
The indicator itself is pictured as two lines: the green one has much smaller period than red and both of them show vigor of movement. The red line is signal (watch pic. 1) Both lines are calculated as symmetrical weighted moving averages with different periods. In the result we get the formula:
Average – moving average;
i – period.
Picture 1. Relative Vigor Index
When green line is above zero, close prices are above open prices and market forces are balanced. Red line also shows equability and serves to clarify signals of green line.
When green line is above red, buyers are in good stead, and that can be taken as signal for purchase. If green line is below the red, we have selling alert.
Application of RVI
A main goal of the indicator is to define probability of change or continuation of trend through indication of vigor. In simpler words, RVI reflects confidence of price by the moment. Since indicator shows market strength, it is better not to use it when trend is strong.
Crossing of two lines can be used as a direct signal. As it was mentioned above, signal for sale is when red line crosses the green one from bottom to top (watch pic. 2) The opposite picture will give an alert for purchase. Usually Stop Loss levels are established just below local minimum level on sales and just above local maximum on purchase.
Picture 2 – RVI, signal for sales
To confirm it is enough to have a look at indicator's lines. Lines will also go up with growth of market, and will get down with market decline.
To avoid false signals provided by RVI in abundance, in those periods other indicators shall be used for a more precise Forex analysis.