Relative Volatility Index: Understanding a Trading Indicator

Relative Volatility Index is a technical analysis indicator that measures the volatility of an asset using a relative approach. It is based on the ratio of the current volatility to the average volatility over a specified time period.

RVI was developed by Donald Dorsey, who believed that traditional volatility indicators like Bollinger Bands and Average True Range were not effective in measuring volatility in trending markets.

RVI is a bounded oscillator that fluctuates between 0 and 100, with 50 being the midpoint. It is plotted on the same chart as the price of the asset being analyzed.

RVI is calculated using the following formula: RVI = 100 x (Average Uptrend Volatility / (Average Uptrend Volatility + Average Downtrend Volatility)).

The Average Uptrend Volatility and Average Downtrend Volatility are calculated separately by taking the sum of the positive and negative changes, respectively, of the asset's closing prices over a specified time period. The time period can be adjusted based on the trader's preference.

When the RVI is above 50, it indicates the uptrend volatility is greater than the downtrend volatility, and vice versa when it is below 50. A reading of 50 suggests the asset is experiencing equal volatility in both directions.

RVI can help traders identify market trends and potential reversals. When the RVI is trending upwards, it suggests the uptrend is gaining strength, while a downward trend indicates the downtrend is strengthening. A crossover of the RVI and its moving average can signal a potential reversal in the trend.

RVI can also help traders identify overbought and oversold conditions. When the RVI is above 70, it suggests the asset is overbought and could be due for a pullback. Conversely, when it is below 30, it suggests the asset is oversold and could be due for a rally.

However, like any indicator, RVI should not be used in isolation. Traders should use it in conjunction with other technical analysis tools and consider the fundamentals of the asset being analyzed.

To use RVI in trading, traders can look for the following signals:

Divergence: When the RVI and the price of the asset are moving in opposite directions, it suggests a potential reversal in the trend.

Overbought/Oversold: When the RVI is above 70 or below 30, it suggests the asset is overbought or oversold, respectively.

Crossovers: When the RVI and its moving average crossover, it suggests a potential reversal in the trend.

Traders can also use RVI in combination with other indicators like Moving Averages, Oscillators, and Volume to confirm signals and improve their trading decisions.

Relative Volatility Index is a valuable indicator for traders looking to measure volatility and identify trends. It can provide valuable insights when used in conjunction with other technical analysis tools and should not be used in isolation. Traders can use RVI to identify potential reversals in the trend, overbought/oversold conditions, and confirm signals from other indicators. With practice, RVI can help traders make better trading decisions and improve their overall performance.