What is the Relative Vigor Index?
This educational project on Forex Trading Academy is about trading with technical indicators, and this time we are looking at one of the most visible technical indicator: the Relative Vigor Index.
The platform used here is the Jforex platform (Get JForex with NSFX Broker) and the indicator is to be found under the momentum indicators, but if you we’re to use for charting purposes the Metatrader, then the indicator is to be found also on the momentum indicators.
Main Advantages in Using the RVI
The advantage of this indicator is that it has a so called Signal Line, and therefore we should guide our entries, or the entry prices, based on the signals received. The RVI (Relative Vigor Index) is an oscillator and therefore it is being applied on the bottom of a chart and its main advantage is that it is extremely visible and simple to understand and interpret. It comes with an overbought and oversold area like any oscillator and this means that call options should be bought by the time the oversold territory is reached while put options should be traded by the time the overbought territory is reached.
However, this is mostly valid in ranging environments as in ranges market is often giving conflicting signals. How to make the distinction between a market that is ranging and one that is travelling in an impulsive move in order to avoid being trapped on the wrong side of a trade?
One answer is coming from the Signal Line mentioned a bit early as, if market is reaching the overbought territory and the Signal Line is moving below the main average and this shows market is turning and you should go SHORT. However, if the oscillator is not reaching the oversold territory and the Signal Line is crossing again, this time on the bullish side, so to the upside, LONG position should be entered and this time more aggressively as it means that the previous signal was a fake one.
Searching for Divergences
Another thing that can be used with the RVI oscillator is to look for divergences price is making when compared with the oscillator. A bullish divergence is always being considered when price is making two separate and consecutive lows while the oscillator is not confirming those lows. In this case, call options are recommended with the expiration date being adjusted to the time frame the oscillator is being placed on.
The same is valid in a bearish divergence, as if price is making two consecutive higher highs but then the oscillator is failing to make the second one (it is being called that is not confirming what price is doing), put options are recommended with the appropriate expiration date.
But even when price is showing a divergence, when is the moment to enter into a trade or, to talk in binary terms, what should be the perfect striking price?
It is being given by the same Signal line as when it is crossing below the main moving average it is showing bearish conditions so put options are being favored and when it is crossing above the moving average it is showing bullish conditions, so call options should be traded.
The Relative Vigor Index oscillator is to be found on the Metatrader platform if you click the Insert tab, then move to Indicators, and under the Oscillators category the RVI is right after its “brother”, the RSI (Relative Strength Index). Choosing the indicator and clicking ok will result in having the main window split into the main one, where price is, and a smaller one, where oscillator is travelling.
However, it should be mentioned that the RVI is not only used as a classical oscillator as it can be used as a trend indicator as well. It is strongly recommended not to consider a contrarian trade as long as the Signal Line is not crossing above/below the main average as it is usually doing that after a bottom or a top is in place.
Using the Signal Line
That being said, it is all about the Signal Line when trading with the RVI oscillator and, in a sense, this is the main difference between the RSI and RVI.
Of course, the RVI, like any oscillator, is highly dependent on what period is being taking into consideration as going with a large number of candles to be taken into account is going to result in a flat oscillator and therefore both the crossings above/below the main moving average as well as the spikes that may appear will not be visible anymore or just too difficult to interpret.
For more clues about how to interpret the RVI and comparison with the RSI as well make sure you check our articles in the Forex Trading Academy section here as we’re cover on top of that different types of divergences as well. Also, the two video recordings for sure will make you clearly understand how to use the RVI in binary options trading.