Introduction to the Relative Volatility Index Indicator
Oscillators can be effective tools that traders can use for trading trend and momentum reversals. The Relative Vigor Index is one of the most effective types of oscillators, and this version of the Relative Vigor Index is an improved version of the classic RVI.
What is the Relative Volatility Index Indicator?
The Relative Vigor Index (RVI) is a trend following technical indicator which is a type of oscillator. It identifies trend and momentum direction and strength by comparing a tradeable instrument’s closing price with its recent trading range.
The Relative Volatility Index indicator however is a modified version. It plots an RVI line which is smoothened out and a signal line which is based on an Exponential Moving Average of the RVI line. It also plots bands around the signal line which can help identify volatility, as well as overbought or overbought market conditions.
How the Relative Volatility Index Indicator Works?
The RVI has a complex formula which is the basis for how it plots the RVI line. It basically takes snapshot comparisons between the close of price and the open of price coming from the previous four periods. This would be the numerator of the RVI. It also compares the high and low of the past four periods, the result of which would be the denominator of the RVI. The numerator and denominator are first averaged out as moving averages before the computation pushes through.
The Signal Line of the RVI is also typically another complex formula which is also derived from the main RVI line.
As mentioned earlier, this version also plots bands based on the modified Signal Line of this RVI.
There are various variables that can be modified under the Inputs tab within its settings, which includes the number of periods for the RVI, the type of moving average used, as well as the number of periods for the smoothing effect.
How to use the Relative Volatility Index Indicator for MT5
The RVI can effectively be used in various ways. It could be used as a basis for divergences. It could be traded as trend reversal signals using the crossover of the RVI line and the signal line.
This version of the RVI can also be effectively used as a mean reversal signal indicator based on the crossing over of the RVI line and the outer lines of the Signal Line bands.
Buy Trade Setup
When to Enter?
Open a buy order as soon as the RVI line crosses above the lower outer line of the Signal Line indicating a mean reversal coming from an oversold market condition. Set the stop loss on the support below the entry candle.
When to Exit?
Close the trade as soon as the RVI line starts to significantly curl back down.
Sell Trade Setup
When to Enter?
Open a sell order as soon as the RVI line crosses below the upper outer line of the Signal Line indicating a mean reversal coming from an overbought market condition. Set the stop loss on the resistance above the entry candle.
When to Exit?
Close the trade as soon as the RVI line starts to significantly curl back up.
Conclusion
The RVI is one of the most effective trend reversal signal indicators coming from the oscillator family of indicators.
This indicator can be used in various ways. However, it is best used when these signals are in confluence. For example, a mean reversal signal which is in confluence with a divergence.
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