Introduction – What is the Relative Vigor Index?
The Relative Vigor Index (RVI) works by combining the closing and open price of a currency pair in its calculation. This is the distinguishing factor between the RVI as a momentum indicator and other momentum indicators. For instance, the Stochastics indicator uses the closing price and the lowest price in its calculation. The RVI is a momentum indicator which is listed under the oscillator indicators on the AG Markets MT4 chart.
What makes up the Relative Vigor Index?
The RVI is calibrated with an indicator window that has a zero line, thereby separating the indicator window into positive and negative values. The zones which is considered highly positive is the overbought zone while the zone in which there are negative values is considered the oversold zone.
The Relative Vigor Index indicator has two lines; the RVI smoothing line which by default is green in colour and is equivalent to the 10-period simple moving average, and the signal line which by default is red in colour and equivalent to the 4-period weighted moving average.
To use the RVI, click on the “Insert” tab, followed by the “Indicators” tab on the drop down menu, then “Relative Vigor Index” under the oscillators class of indicators.
How to Trade with the Relative Vigor Index
The Relative Vigor Index predict changes in price before they actually happen, thus making the RVI a leading indicator which can be used for trend reversal trades. It can also be used for divergence trades.
Trend Reversal Trades
Trend reversals can occur when the smoothing and signal lines cross in overbought or oversold territory. However, this trade must be confirmed by the presence of technical supporting information on the charts.
This trade example displayed above shows a trend reversal trade. The Relative Vigor Index lines can be seen crossing at a heavily negative area, which is considered as the oversold area. Confirmation of trend reversal is seen with the appearance of a candlestick reversal pattern (the hammers) at the bottom of the chart following a period of downtrending prices. The trader can decide to go long at that area, and may decide to exit the trade if the RVI enters the overbought area. These setups must ideally be practiced and left for the trader to decide.
The divergence of the RVI from price action presents another type of trade opportunity. The consideration points for the RVI indicator are the areas where the smoothing and signal lines have crossed at positive and negative areas. These are the areas which may form the lows and highs for divergence consideration.
When the RVI diverges from price action, it is expected that the divergence will correct itself after some time with the price moving in the direction of the RVI.
The chart above shows the RSI smoothing and signal lines crossing at two negative areas. These two areas form lows and when they are joined with a trend line, they form higher lows. On the chart, the lows of the price which correspond to the lows of the RVI are actually lower lows. Therefore we expect price to correct upwards in the direction of the RVI divergence.
Is there a technical parameter to support a trade entry? Yes there is and this is in the form of the falling wedge, which is a bullish reversal signal. The break of the upper trend line of the falling wedge signals that the bullish correction of the divergence has commenced and the trader may decide to go ahead with a long trade to mirror this divergence.
All trades must be adequately rehearsed on a demo account, especially when it comes to identification of the technical parameters which support the trade entry that the trader is looking for in the pursuit of the correction of the RVI divergence.