Relative Vigor Index (RVI)

Relative Vigor Index (RVI)

Key takeaways
* The Relative Vigor Index (RVI) is a momentum indicator that measures trend strength by comparing closing price to the trading range and smoothing results with moving averages.
* RVI is a centered oscillator (around a zero line). Crosses of its signal line and divergences with price are common trading signals.
* It works best in trending markets and can give false signals in rangebound conditions. Use with other technical tools to improve reliability.

What the RVI measures
The RVI gauges the conviction of a price move by exploiting the tendency for prices to close near the top of the range in uptrends and near the bottom in downtrends. It smooths short-term noise with weighted averages, producing a value that oscillates around zero rather than between fixed bounds.

Formula (clear notation)
Let for bar t:
* a_t = Close_t − Open_t
* e_t = High_t − Low_t

Compute a 4-bar weighted average for the numerator and denominator:
numerator_t = (a_t + 2·a_{t-1} + 2·a_{t-2} + a_{t-3}) / 6
denominator_t = (e_t + 2·e_{t-1} + 2·e_{t-2} + e_{t-3}) / 6
Then:
RVI_t = SMA(numerator over N periods) / SMA(denominator over N periods)
The signal line is a 4-bar weighted average of recent RVI values:
Signal_t = (RVI_t + 2·RVI_{t-1} + 2·RVI_{t-2} + RVI_{t-3}) / 6
Common practice: traders often use N = 10 (periods can be minutes, hours, days, etc.), but N can be adjusted to suit the time frame and desired sensitivity.

How to calculate (step-by-step)
1. Choose N (the number of periods for the SMA).
2. For each bar, compute a_t and e_t (Close−Open and High−Low).
3. Compute the 4-bar weighted numerator_t and denominator_t as shown above.
4. Take the SMA of numerator_t and denominator_t over N periods.
5. Divide the SMAs to get RVI_t.
6. Compute the signal line using the 4-bar weighted average of recent RVI values.
7. Plot RVI and its signal line above or below the price chart.

Interpretation and trading signals
* Center line: RVI oscillates around zero. Values above zero indicate bullish bias; below zero indicate bearish bias.
* Crossovers: When RVI crosses above its signal line, that’s a bullish signal; a cross below is bearish. Crosses are intended to be leading indications of price direction.
* Divergences: If price makes a new high while RVI makes a lower high (or price makes a new low while RVI makes a higher low), this divergence suggests a potential near-term reversal toward the RVI’s direction.
* Context matters: Like other oscillators, the RVI can stay at extremes during strong trends. Always confirm with price action, trendlines, or other indicators.

Strengths and limitations
Strengths
* Attempts to be a leading measure of momentum by comparing close vs. open within the bar.
* Weighted smoothing reduces noise and short-term whipsaws relative to raw close−open measures.

Limitations
* Prone to false signals in sideways or choppy markets.
* Sensitivity depends on chosen period N — shorter N increases signals but also noise; longer N smooths but lags more.
* Best used in combination with trend analysis and complementary indicators (e.g., moving averages, volume, trendlines).

Practical tips
* Use RVI primarily in trending markets; confirm trend direction before acting on RVI signals.
* Combine RVI signals with price-based confirmation (breakouts, support/resistance, trendlines) to reduce false entries.
* Consider lengthening N when the market is noisy to reduce whipsaws; shorten N when you need earlier signals and accept more noise.
* Backtest RVI settings and rules on your specific asset and time frame before trading live.

Conclusion
The Relative Vigor Index is a momentum-based, centered oscillator that highlights whether closes are tending to occur toward the top or bottom of each bar’s range. Its most useful applications are identifying signal-line crossovers and divergences in trending markets. Use it alongside other technical tools and choose period settings that match your time frame and risk tolerance.