The Range Verification Index or RAVI is used to identify the trending market. Introduced by Tushar Chande in his book Beyond Technical Analysis, RAVI shows the difference between the current prices and the past prices in percentage. The Range Action Verification Index indicator can be used on your trading platform charts to help filter potential trading signals as part of an overall trading strategy.
What is the Range Action Verification Index?
The Chande’s Range Action Verification Index (RAVI) indicator was developed by Tushar Chande. As the ADX indicator, the RAVI is used to identify whether a market or security is trending. The RAVI indicator is calculated using moving averages of different lengths. The first one is a short moving average with a lookback period of 7 bars. The second one is a long moving average with a lookback period of 65 bars. The indicator returns a percentage value. Above a certain threshold, the market is considered trending.
Chande suggested two lines of the RAVI for its dependence on the market.; 3% and -1%. He mentioned the 13-day SMA as the source of indicator. It shows the quarterly (3 months = 65 working days) market sentiment.
A bullish trend appears when the RAVI crosses above the 3% line. The bullish trend continues to appear as long as the RAVI is above 3%.
On the other hand, the bearish trend begins when the RAVI crosses below the 1% line. The bearish trend remains as the indicator is below -1%.
In the picture below, you can see the RAVI indicator on a GBP/USD chart. Notice there is a single line, which is similar to the moving averages.
If the RAVI turns back to 0 line, this is an indication that the trend has ended, and now it is in a trading range. And, if the RAVI doesn’t enter between the area of 3% and -1%, this shows the trend has resumed.
To set the indicator on MT4, you can change the input values of Period 1 and 2, but many traders may choose to keep them as default. Note that Period 1 is a fast-moving average, while Period 2 is a slow-moving average.
This gives us the equation for the RAVI:
RAVI= ((MAfast – MAslow)/MAslow*100%
You can also alter the moving average (SMA) used in the indicator to adjust to your own trading strategy and style.
How to use the Range Action Verification Index?
As RAVI is a trend trading indicator, it helps to identify the trend in its earlier stage and filters flat price movements.
Like the ADX indicator, it differentiates between the trading market and the trending market. But ADX has two smoothings, and RAVI has one smoothing. This makes RAVI more precise than the ADX.
Buy signals are generated if the RAVI is above the 3% line and a sell signal below -1%.
Divergences are also possible with the RAVI. A bullish divergence occurs when the price reaches a new low, and the RAVI reaches a higher bottom.
Conversely, a bearish divergence appears when the price reaches a new high, and the RAVI is at the lower top.
In the modified version, RAVI displays a histogram similar to the MACD. A bullish trend appears when the histogram bars are above the 0 level. And, a bearish trend occurs when the histogram bars are below the 0 level.
Range Action Verification Index trading strategy
Originally, Chande developed RAVI for the daily charts. Thus, you can use it for day trading strategies.
Long-term traders can also benefit from the RAVI for detecting the trend as it can show 65 days’ market movements.
You can also use Ravi with other technical indicators to enhance your forex trading strategies.
The RAVI indicator deploys two simple moving averages in its calculation and deploys the absolute value of result making sure all its values are positive. The “0.3” level is an information line for this indicator and if by any means the indicator surges above the “0.3” level, it is assumed that price is in a rising trend. However, if the FAVI indicator pushes below the “-0.3” level, price is said to be in a downward trend.
Range Action Verification Index buy strategy
- The RAVI indicator must be above the zero line.
- Wait for the price bar to go bullish before entry.
- Set a stop-loss near the recent swing low.
- Exit the trade when the Ravi drops.
Range Action Verification Index sell strategy
- The Ravi indicator must be below the zero line.
- Wait for the price bar to go bearish before entry.
- Set a stop-loss near the recent swing high.
- Exit the trade when the Ravi rises.
Range Action Verification Index Conclusion
Developed by Tushar Chande, the Range Action Verification Index (RAVI) is used in order to help identify if the market is in a trend. The indicator shows the difference (in percentage) between the current prices and the past prices. Two key lines are recommended by Chande for the RAVI – 3% or 1% in dependence on the market.
A bull trend begins, when the RAVI crosses the 3% key line from bottom-up. The bull trend is considered as active as long as the indicator line moves up.
The Range Action Verification Index is a useful trading indicator for determining the difference between the current price and the past price. It can be used as a filter between oscillators and the trend-following indicators.
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