The Relative Vigor Index (RVI) is a technical analysis indicator that measures the strength of a trend by comparing a security’s closing price to its trading range. Developed by John Ehlers, the RVI aims to provide traders with insights into the vigor or energy behind price movements.
Understanding Relative Vigor Index (RVI)
The RVI is calculated using a formula that takes into account the relationship between a security’s closing price and its trading range. Specifically, it compares the difference between the current closing price and the previous closing price to the difference between the high and low prices over a specified period.
Formula
The formula for calculating the Relative Vigor Index is as follows:
RVI = (Close – Open) / (High – Low)
Where:
- Close = Current closing price
- Open = Previous closing price
- High = Highest price during the period
- Low = Lowest price during the period
Interpretation
Traders use the RVI to gauge the strength of a trend. When the RVI is rising, it indicates that the closing price is consistently higher than the opening price, suggesting bullish momentum. Conversely, when the RVI is falling, it suggests bearish momentum, as the closing price is consistently lower than the opening price.
Usage
The Relative Vigor Index is often used in conjunction with other technical indicators to confirm trends and identify potential entry and exit points. Traders may look for divergences between the RVI and price action, which could signal a potential reversal in the trend.
Limitations
Like any technical indicator, the Relative Vigor Index has its limitations. It may generate false signals during periods of low volatility or choppy market conditions. Additionally, traders should be aware that the RVI is not infallible and should be used in conjunction with other forms of analysis for comprehensive decision-making.
