Relative Volatility Index (RVI) was developed by Donald Dorsey, not as an independent trading indicator but as a confirmation of the trading signals. It was first introduced in the journal “Technical Analysis of Stocks and Commodities” in June 1993. The redesigned indicator appeared in September 1995. The Relative Volatility indicator measures the standard deviation of price changes within a defined range of lookback periods to determine market direction. The indicator value is normalized as a percentage between 0 and 100.
What is Relative Volatility Index (RVI)?
The Relative Volatility Index is similar to the Relative Strength Index (RSI) but it shows the maximum and minimum prices of the standard deviation in a particular range. The Relative Volatility Index can range from 0 to 100 and, unlike many indicators, does not show price movement, but rather measures its strength.
The RVI is calculated in much the same way as the Relative Strength Index, but instead of price changes for calculations, a 10-day standard deviation of close price is taken here. The RVI is also similar to the Stochastic Oscillator in that the RVI compares the high prices of the day, where the Stochastic Oscillator uses the low prices of the day.
Relative Volatility Index formula
S = Stddev [10 days] – standard deviation for a 10-day period
U = S if price> prev price – if the price is higher than the price in the previous period
U = 0 if price <prev price otherwise
EMA [W14] from U
RVIorig = 100 * ————-
EMA [W14] from S
EMA [W14] – exponential moving average in 14 days
RVIorig of highs + RVIorig of lows
RVI = ——— ————————-
RVIorig of highs – Relative Volatility Index highs
RVIorig of lows – Relative Volatility Index lows
If the data source does not provide high/low accuracy values, then StdDev for ten days is replaced by default with EMA for 14 days.
How to use Relative Volatility Index indicator?
The relative volatility index was developed not as a separate indicator, but as a confirmation of trading signals. It was created to measure the direction of movement of volatility. It is most widely used in combination with a moving average; it does not repeat the signals of oscillators (RSI, MASD, stochastic oscillator, rate of change, etc.), but can be used to confirm them. Dorsey believed that many trading systems could be improved by using this indicator as a filter.
You can use the overbought and oversold areas to trade using the Relative Volatility Index. For this, you have to observe in the history of the chart to find the areas of oversold and overbought. For example, the chart below shows that 65 is the overbought area while 35 is the oversold area.
You can use the Relative Volatility Index to spot price divergence and trade it. Divergence appears when there is disagreement between the direction of price and the indicator.
The RVI can be used as a confirming indicator since it uses a measurement other than price as a means to interpret market strength. The RVI measures the direction of volatility on a scale from 0 to 100. Readings greater than 50 indicate that the volatility is more to the upside.
Basically, the Relative Volatility Index is just a line that moves up and down. When adding it in a chart, you just need to select it and select the settings that you want. You can only change the colour of the indicator, the length, and the overbought and oversold levels.
Relative Volatility Index trading strategy
The Relative Volatility indicator measures the standard deviation of price changes within a defined range of lookback periods to determine market direction. The indicator value is normalized as a percentage between 0 and 100.
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.
A simple trading strategy is presented here. However, you may add other trend trading indicators for further information.
Relative Volatility Index buy strategy
- You can buy if the Relative Volatility Index is above 50.
- If the first buy signal is missed, we can buy it when the Relative Volatility Index is above 60.
- We could close a long position when the Relative Volatility Index falls below 40.
Relative Volatility Index sell strategy
- An asset can be sold if the Relative Volatility Index is below 50.
- If the first sell signal is missed, then we could sell when the Relative Volatility Index is below 40.
- We could close a long position when the relative volatility index rises above 60.
Relative Volatility Index conclusion
The relative volatility index measures other indicators of market dynamics compared to other indicators. The Relative Volatility Index (RVI) is similar to the Relative Strength Index (RSI) index. Both measure the direction of volatility, but RVI uses the standard deviation of price changes in its calculations, while RSI uses the absolute price changes.
Dorsey believed that “there is no reason to expect the Relative Volatility Index to be better or worse than the RSI, as an indicator. Its advantage is that it (a confirmation indicator) considers the levels of diversification lost by the RSI.”
The Relative Volatility Index indicator can be used on your trading platform charts to help filter potential trading signals as part of an overall trading strategy. The Relative Volatility is not a popular indicator in the financial market as the indicator often provides the wrong signals when used along, making it a difficult one to work with.
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