Momentum indicators such as the relative vigor index can be very useful indicators if used and interpreted correctly. These technical indicators can help to determine the current market conditions, including trends and ranges. They can act is a filter for a variety of different forex trading strategies. The momentum should capture the dynamics of the course and thus provide information about whether the currently prevailing trend is stable or weakening.
What is the Relative Vigor Index indicator?
Relative vigor index (RVI) is a momentum indicator that, in contrast to standard momentum indicators, does not only compare the close price difference of a certain period, but rather relates the range between lows and highs as well as opening and closing prices. The indicator is also smoothed with a signal line, e.g. a moving average is calculated.
Meanwhile, momentum indicators can be calculated in different ways. One of the most common momentum indicators is momentum itself. But the RSI indicator (relative strength index) also belongs to the genus of momentum indicators.
However, whilst the momentum indicator measures the closing price difference compared to the previous day, the relative vigor index relates the price range between the day’s high and low to the price range between the opening and closing price.
So, the greater the difference between the two ranges, the weaker the movement in the respective direction was and vice versa.
How to trade with the Relative Vigor Index indicator?
The interpretation of the relative vigor index indicator is not very complicated. There is a zero line, the indicator line, and the signal line that should be observed. You may notice that the signals that the indicator generates according to the general rules of interpretation should rather be seen as price-confirming. The indicator can therefore be running behind the course most of the time, otherwise known as lagging.
This leads us to conclude that the relative vigor index should be used in a similar way to the RSI indicator, so it is less a question of the direction it indicates and more of what tendencies it shows. With that, we come back to the famous divergences or confirmations of the course itself.
Relative Vigor Index trading strategy
With this knowledge, we can now develop a forex trading strategy. There are three rules that can generate more good signals.
- There should be a divergence between the price and the indicator.
- The turnaround accelerates, and the zero lines are broken.
- After breaking the zero line, the indicator remains strong.
Unfortunately, despite the already optimized rules, not every trading signal is going to be reliable. Admittedly, anyone who expects 100 percent reliable signals each and every time should perhaps revaluate if online trading is for them. The markets are of course not exclusively dominated by technical indicators but are subject to unexpected risks, which mostly arise for political or fundamental reasons. The question that should be asked is, therefore, not, “How do I get a 100% reliable signal?” But rather, “How can I counter the unexpected risks?”. Implementing good money management and strict traders discipline are also very important factors to consider.
So, if we look at the current GBP/USD chart with the RVI indicator, we will see the following. If we use the three rules above to get started, in many cases, it will be too late, because once the zero lines are exceeded or undershot, the medium-term trend is already very far advanced.
If we take a closer look, crossing the zero line was accompanied by a countermovement which is unsatisfactory. We must, therefore, consider whether we should not reject this rule, which we will do. Since the third rule arises from the second, unfortunately, this one cannot be used for our purposes. The only rule that can be used for us in this instance is RVI divergence. Noting that we are discussing trading the RVI alone rather than in combination with other analysis which would be imperative if looking to fitler false signals.
A divergence is particularly useful in short-term trading because short-term strategies don’t expect big trends anyway. So, if we focus on using divergence as the primary signal, all we need is to break through an important zone to continue to confirm the emerging weakness. The whole thing could work – with options of at least one hour traded.
The upper chart shows the 1-hour chart of the GBP/USD pair. The first divergence can send us a good signal. We are still waiting for the upward trend to breakthrough. If this takes place, we basically have two options: either immediately buy an option with a term of one hour or wait for the retest. In the first case, both options would have led to success. If we look at the second divergence, no relevant zone can be immediately identified. This came later; by then, the RVI divergence was already resolved. So, in some cases, it makes sense to stand still and not to act. I often see traders trying to force trades that are not there which leads to over trading and encourages poor trading discipline.
Relative Vigor Index conclusion
The Relative Vigor Index (RVI) is an oscillator based on the concept that prices tend to close higher than they open in up trends and close lower than they open in down trends. Basically, it is an oscillator that is in phase with the cycle of the underlying’s price. The RVI indicator can be used to spot weaknesses in trends and overbought or oversold market conditions. It is also a useful tool for marking divergence. RVI is naturally a leading indicator, and when ‘partnered’ with other oscillators, such as Stochastics or RSI, they can deliver definitive and high quality overbought and oversold trading signals.
The relative vigor index indicator is flexible to differing market conditions, thus can be used as part of a forex trend trading strategy and forex range trading strategy. However, notice that the relative vigor index indicator may lag like any other statistical indicator.
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