The relative vigor index (RVI) is a lesser-known but powerful momentum oscillator used in technical analysis to identify trend strength and potential reversal points in the forex market. As a versatile indicator incorporating aspects of other popular indicators like the stochastic oscillator and moving averages, the RVI provides unique insights into market dynamics when applied properly.

## What is the Relative Vigor Index and How Does it Work?

The relative vigor index (RVI) is a technical momentum oscillator that measures the strength and speed of price movement over a set period of time. First introduced by John Ehlers in 2002 in his book “Rocket Science for Traders”, the RVI was designed to improve upon the shortcomings Ehlers observed in existing momentum oscillators like the RSI, stochastic, and stochRSI. Specifically, the relative vigor index aims to identify trend direction and strength with less lag and fewer false signals compared to other oscillators. It does this by incorporating aspects of both Welles Wilder’s directional movement concepts and stochastic momentum principles.

The RVI calculates the strength of a current price move relative to the magnitude of recent price bars over a user-defined lookback period. This approach makes the indicator adaptive, as the signals continuously adjust based on dynamically updating inputs.

As an oscillator, the RVI fluctuates between 0 and 100. Readings above 50 indicate positive momentum, while readings below 50 signal negative momentum. The further the RVI moves toward its upper or lower extremes, the stronger the momentum.

Crossing above or below the 50 centerline is considered a basic buy or sell signal, similar to other bounded oscillators. The RVI is double smoothed to filter out market noise and generate more reliable crossover signals.

Overall, the relative vigor index excels at gauging trend strength, spotting potential reversals early, and providing confirmation for other indicators – making it a versatile tool for forex traders using technical analysis.

Now that we’ve covered the basics, let’s take a deeper look at how the RVI calculates its values and how to interpret the signals it generates.

## Interpreting RVI Indicator Readings

When examining relative vigor index signals, there are a few key things to look for:

- Crossovers at the 50 Centerline – Bullish when RVI crosses above 50, bearish when crossing below 50. Provides early entry signals in the direction of the emerging trend.
- Overbought/Oversold Levels – Readings above 80 indicate overbought conditions, while levels below 20 signal oversold conditions. Useful for identifying potential reversal points.
- Direction of Slope – The angle of the RVI’s slope indicates accelerating or decelerating momentum. Upward slope shows bullish strengthening, downward slope signals bearish weakness.
- Divergences – Divergences between price and RVI can foreshadow impending trend changes. For example, when price makes a new high but RVI fails to exceed its previous high point, expect a reversal down.
- Smooth vs. Volatile Movement – Steady RVI movement signals a strong established trend, while choppy/volatile RVI indicates indecision and weakness. Smooth trends persist, volatile ones reverse.
- Speed of Crossovers – Faster RVI crossovers suggest stronger momentum, while slower crossovers indicate weaker momentum. Reversals tend to be more durable following faster crossovers.
- Distance from 50 Centerline – The further the RVI stretches from its midpoint, the greater the trend strength. Moves exceeding 60 or below 40 signal extreme momentum that can persist.
- Volume Confirmation – For the most reliable signals, look for increased trading volume to confirm RVI crossover breakouts and divergences. Volume validates the price and momentum move.

Getting a feel for how the RVI typically moves takes some practice interpreting its ebbs and flows. Now let’s compare the RVI with other popular indicators.

## RVI vs. Other Oscillators Like Stochastic & RSI

The relative vigor index combines aspects of other momentum oscillators like the stochastic and RSI, improving on their individual weaknesses. Here’s how the RVI stacks up:

- RVI vs. Stochastic – Both measure momentum using closing prices within lookback periods. However, stochastics tend to be noisier and prone to false breaks, while the RVI’s double smoothing generates more accurate and timely crossover signals.
- RVI vs. RSI – The RSI only considers closing price changes, causing lag on trend reversals. The RVI incorporates both price and volume data for earlier detection of new trends as they start.
- RVI vs. MACD – The MACD is also a double smoothed momentum indicator. But while the MACD uses static exponential moving averages, the RVI’s lookback period dynamically adapts to changing market volatility.
- RVI vs. OBV – OBV focuses solely on volume changes. RVI analyzes both price action and volume together, revealing a more complete picture of market momentum.

Overall, the RVI combines the strengths of multiple oscillator tools to provide more versatility in market analysis compared to other single indicators.

Now let’s move on to using RVI signals in actively trading the forex markets.

## Using RVI Signals for Forex Trading

The relative vigor index produces trading signals that can be incorporated into forex strategies in a few key ways:

Confirming Trend Direction – The slope and position of the RVI shows whether momentum aligns with the prevailing price trend. Rising RVI confirms uptrends, falling RVI confirms downtrends.

Identifying Reversals – Overbought/oversold extremes and centerline crossovers reveal when momentum is shifting from bullish to bearish or vice versa.

Timing Entries – Early RVI crossover signals tip off traders to impending trend changes right as they start unfolding.

Determining Exits – Divergences signal when a move is losing steam so traders know when to take profits.

Filtering Price Signals – Only take buy/sell signals from other indicators when RVI aligns, avoiding false breaks and whipsaws.

Analyzing Volatility – Smooth RVI indicates steady trends, while choppy RVI reflects uncertainty and indecision.

Measuring Conviction – Strong, fast RVI moves show high conviction behind trends. Weak, gradual moves imply lower conviction.

In terms of specific trading strategies, here are a few reliable setups for applying RVI:

- RVI/Price Trend-Following – Go long when RVI slopes up and price makes new highs in an uptrend. Sell when RVI slopes down and price makes new lows in a downtrend.
- RVI Crossover Breakouts – Buy when RVI crosses above 50 and sell when crossing below 50, capturing momentum shifts early.
- RVI Divergences – Fade price extremes when RVI diverges, either topping or bottoming earlier. These divergences signal impending reversals.
- Overbought/Oversold Fades – Look for price pullbacks when RVI reaches overextended levels over 80 or under 20.
- RVI/MACD Combination – Use MACD for trend-following. Then apply RVI for higher probability entry signals in the MACD’s direction.

Now that we’ve covered basic trading tactics, let’s explore combining the RVI with other indicators for greater accuracy.

## Combining RVI with Other Indicators

While potent on its own, the relative vigor index performs best when used alongside complementary indicators. The RVI works especially well confirming signals from:

- Moving Averages – Moving averages define the primary trend direction. RVI crossover signals time entries in the direction of the longer moving average.
- MACD – MACD generates trend-following signals. RVI provides additional momentum confirmation for higher probability MACD trades.
- RSI – Overbought/oversold readings from RSI indicate potential turning points. RVI divergences add confirmation when RSI reaches extremes.
- On-Balance Volume – OBV measures positive/negative volume flows. Combining RVI with OBV provides a more complete picture of price action and conviction.
- Bollinger Bands – RVI helps confirm bounces versus breaks of Bollinger Band channels. Riding bands in the RVI’s direction often leads to the best momentum trades.
- Chart Patterns – RVI helps determine the strength and validity of chart pattern breakouts, preventing false breaks.
- Fibonacci Retracements – RVI can define optimal entry points within Fibonacci retracement levels by pinpointing momentum shifts.

These combinations demonstrate the RVI’s versatility confirming trends, gauging momentum, and boosting other indicator signals.

Now let’s take a deep dive into exactly how the relative vigor index formula works.

## Relative Vigor Index Calculation Method

The mechanics behind the RVI involve a multi-step process:

### 1. Compute Price Differences

- Calculate the difference between the current period’s close and previous close

### 2. Compute Volume Differences

- Calculate the difference between current period’s volume and previous period’s volume

### 3. Smooth Price Differences

- Apply 10-period simple moving average to the price differences

### 4. Smooth Volume Differences

- Apply 10-period simple moving average to the volume differences

### 5. Calculate Ratios

- Divide the smoothed price difference by the smoothed volume difference

### 6. Sum Lookback Period Ratios

- Add the ratios over a defined 14-period lookback window

### 7. Create Indicators

- Calculate a 12-period signal line based on the sum of ratios
- Calculate a 5-period signal line based on the 12-period signal line

### 8. Calculate Relative Vigor Index

- Divide the 5-period signal line by the 12-period signal line, then multiply by 100

This multi-stage calculation process is what enables the RVI to analyze both price action and trading volume together over dynamically adjustable lookback windows.

Now let’s break down the RVI formula itself and how it generates values.

## Relative Vigor Index Formula & Components

The complete RVI formula is calculated as follows:

RVI = (MA(SMA(Price Diff, 10), 5) / MA(SMA(Price Diff, 10), 12)) x 100

Breaking this down:

**Price Diff**– The difference between the closing price today and closing price yesterday**SMA**– A 10-period simple moving average applied to smooth the price differences**MA**– A 5-period moving average of the 10-period SMA, and a 12-period MA of the 10-period SMA**Divide**– The 5-period MA divided by the 12-period MA**Multiply by 100**– To convert the ratio into an oscillator fluctuating between 0 and 100

This structure allows the RVI to analyze the smoothed pace of price changes over time windows tailored to short, medium, and longer-term momentum.

The key settings that can be adjusted in the RVI formula are the lengths of the smoothing moving averages and ratio lookback periods. Let’s examine how tweaking these parameters impacts the indicator’s behavior.

## Relative Vigor Index Settings & Parameters

The most influential adjustable settings for fine-tuning RVI signals are:

- Price/Volume SMA Periods – The standard length is 10 periods. Lower values make RVI more sensitive, higher values smooth out oscillations.
- Signal Line MA Periods – The standard lengths are 5 & 12 periods. Shorter MAs react faster to momentum shifts, longer MAs generate smoother signals.
- Lookback Period – The standard lookback is 14 bars. Longer lookbacks track longer momentum cycles, shorter periods focus on recent momentum.

Price/Volume Smoothing – The optimal smoothing periods depend on the forex pair and timeframe you trade. More volatile pairs and shorter timeframes warrant shorter smoothing for sensitivity. Trade slower pairs on longer timeframes with longer smoothing periods for smoothness.

Signal Line Balance – Use shorter 5-period signal settings for responsiveness, longer 12-period settings for confirmations. Find a balance suitable to your strategy and risk preferences.

Lookback Fit – Choose a lookback window length that captures the momentum cycles you analyze. Day traders may opt for 5-10 bars, while swing traders examine 10-20 bar lookbacks.

Take time to experiment with these RVI settings to match your trading style, strategy rules, market conditions, and timeframes.

Now let’s move on to applying the optimized RVI in example trading tactics and strategies.

## Relative Vigor Index Trading Strategies

There are many effective ways to employ the relative vigor index as part of rules-based trading plans. Here are 5 proven RVI trading strategies to consider:

### RVI Trend-Following Strategy

This straightforward approach applies the RVI to define and follow existing trends:

**Rules:**

- Go long when RVI slopes upward and price makes new highs
- Exit longs when RVI drops below 50 from above
- Go short when RVI slopes downward and price makes new lows
- Close shorts when RVI rises above 50 from below

### RVI Pullback Entries Strategy

This method uses RVI to time entries during retracements in the dominant trend direction:

**Rules:**

- Identify primary trend with 200 SMA on hourly chart
- Wait for pullback to 50 SMA support/resistance
- Enter when RVI crosses back above/below 50 in trend direction

### RVI Divergence Strategy

These rules capitalize on RVI divergences signaling impending reversals:

**Rules:**

- Spot price making new highs/lows with RVI diverging
- Enter when RVI crosses 50 in opposite price direction
- Set stop beyond price extreme that failed to confirm

### RVI Moving Average Crossover Strategy

This approach layers moving averages and RVI for high-probability signals:

**Rules:**

- Identify trend bias with 20 & 50 period EMAs
- Wait for faster 5 EMA to cross 20/50 EMAs
- Enter when RVI crosses 50 in direction of moving average crossover

### RVI & Candlestick Pattern Strategy

Here RVI filters candlestick signals to avoid false breakouts:

**Rules:**

- Find bullish/bearish candlestick patterns like engulfing or harami
- Wait for clean breakout bar on increased volume
- Enter only if RVI aligns with candlestick signal direction

These are just a sample of the many possibilities for integrating RVI into rule-based strategies across any timeframe or forex pair.

Now that we’ve covered strategies, let’s discuss the key strengths and limitations of the RVI indicator.

## Strengths and Limitations of the RVI Indicator

Like any indicator, the relative vigor index has both advantages and downsides. Let’s examine these pros and cons:

### Strengths:

- Adapts to changing volatility based on dynamic lookbacks
- Smooths noise with double moving averages
- Rapidly identifies new momentum shifts and trend changes
- Oscillator structure generates clear crossover signals
- Confirms price action with volume for quality signals
- Leading divergences provide advanced warning of reversals

### Limitations:

- Can produce false signals in very choppy or ranging markets
- Divergences don’t unfold consistently enough for stand-alone trading
- Requires fine-tuning parameters to match trading style and timeframes
- Lacks clear overbought/oversold threshold levels seen in RSI or stochastics
- Difficult to master interpreting smooth vs. choppy RVI movements

Overall, the RVI excels at gauging momentum strength, signaling trend reversals early, and boosting other indicators. But like with all indicators, it should not be used in isolation.

Now let’s wrap up with tips for applying RVI effectively based on its strengths and limitations.

## Tips for Effectively Using RVI in Forex Trading

Here are final tips for getting the most out of relative vigor index signals in your analysis and trading:

- Use RVI mainly for trend direction and strength – Don’t expect precise entry and exit timing
- Focus on smooth and steady RVI slopes – Choppy RVI lacks conviction
- Combine RVI with price action and other indicator confluence
- Adjust parameters to match your timeframes and strategy rules
- Wait for RVI to confirm other indicator signals for higher odds
- Use RVI more for spotting reversals early rather than overbought/oversold
- Implement prudent risk management around entries, targets, and stops
- Stick to trading in the main trend direction shown by RVI
- Practice reading RVI movements to master interpreting momentum
- Maintain objectivity and discipline following RVI signal rules

Employing the relative vigor index properly according to these tips and best practices can enhance any trader’s market analysis.

## Conclusion

The relative vigor index is a versatile momentum oscillator that reveals detailed insights into trend strength and potential reversals in forex trading. By combining aspects of price action, volume, and volatility over dynamic lookbacks, the RVI generates high-probability signals other indicators often miss.

However, like with any technical tool, the RVI is most effective when combined with overall price action analysis and other confirming indicators.