By Taylor Wilman

In foreign exchange markets, many traders who are discussing the RVI indicator are suggesting that it’s their secret to interpreting technical analysis charts successfully. According to them, with it, the task of analyzing certain market conditions becomes simple. Over other indicators, it’s what they prefer since it allows them to make comparisons, which they can use for better predictions.

RVI 101

Relative Vigor Index or RVI is a technical analysis indicator that can be used to identify vigor (i.e. the market’s energy level). It can provide details such as closing and opening price levels, and when the market is following a bullish or bearish trend. Since it can assist you in establishing price movements between closing and opening markets, it can be instrumental in foreseeing the overall action of the current market.

Versatility, Versatility, Versatility,

An advantage of the RVI indicator is its versatility. Depending on your preferred approach, it can be used to understand each calculation. For one thing, other than simply letting you determine the differences between closing and opening prices, and maximum and minimum prices, it can define the average volatility of adjusted movements. In other words, it can explain how certain figures add up, which can be a start of creating long-term, profitable strategies in the forex market.

Short-Term vs. Long-Term

A short RVI (e.g. a 10-period RVI) can be useful for daily analysis in forex markets. Since movements can vary quickly, an indicator of this form will let you know every time the momentum begins dropping. A longer RVI, on the other hand, can tell you when prices going in an opposite direction have caught up to the prices in your preferred direction.

It’s Not the Stochastic Oscillator, Okay?

Since both indicators follow the same concept, the RVI indicator and the Stochastic Oscillator are sometimes mistaken to be one and the same. However, RVI focuses on comparing figures relative to opening prices. Whereas, the high and low prices, as well as price breakout periods, are the targets of the Oscillator.

With the RVI indicator, you can conclude that instead of simply calculating prices, it can be helpful to acknowledge price movements that are influential within a specified period. If there is an upward movement, for instance, the tool will provide a clear representation of an increase in value.

The RVI Indicator Formula

The RVI indicator calculates figures by first, getting each of the differences between the closing price and the opening price and the maximum price and the minimum price. This reveals that the top-range prices are closely relative to the low-range prices. Once both results are obtained, divide the former by the latter so you can finally establish an exponential moving average.

The formula:

RVI = (closing price – opening price) / (maximum price – minimum price)

Let’s Now Plot the RVI Indicator

Plotting RVI requires a simple moving average (usually, a 4-period moving average) of all the values used for trading. The objective is to identify a point where a continuation of momentum can occur. Since it follows an RVI’s movement, it can determine a downward trend, as well as a price’s tendency to go in a direction relative to its range.

Technical parts have been taken from http://www.investopedia.com/terms/r/relative_vigor_index.asp and   Mtrading.my – a Forex broker from Malaysia.

Article by Taylor Wilman