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Academy > Technical Analysis > Relative Vigor Index (RVI): Measuring Crypto Energy Levels >

Relative Vigor Index (RVI): Measuring Crypto Energy Levels

2022-08-23 03:55:32

Summary:

  • The Relative Vigor Index indicator is a trend-based indicator that measures the deviation between opening and closing prices as a proxy for the “vigor” or the energy of the trend to determine if the trend is going to hold.
  • The indicator assumes that in a trending market, when an asset is on an upswing, the closing price of the current day will be lower than the closing price on the next day.
  • The oscillator is range-bound with a positive range boundary at +0.50 (indicating bullish levels) and a negative range boundary at -0.50 (bearish levels).

 

Relative-Vigor-Index

 

What Is Relative Vigor Index?

Relative Vigor Index (RVI) is a trend trading indicator that is based on daily opening and closing prices of stocks, with the vigor, or energy, of the stock determined based on the closing prices.

The RVI may be a less effective indicator for crypto as crypto markets are open 24/7; the opening and closing times in crypto are fixed at 00:00 UTC, and hence opening and closing prices are the same. As such, the best use for this indicator in crypto trading is when there’s a strong trend. If Bitcoin is consistently going up or going down, this indicator can confirm the strength or the “vigor” of the trend.

The RVI indicator is a range-bound oscillator that moves between +0.50 and -0.50 and is interpreted the same as other momentum oscillators based on the area it’s moving in, which can be positive or negative.

When using the RVI in crypto, the index assumes that if Bitcoin (BTC) or another altcoin is in a bull run, prices will likely close higher the next day in an uptrend or close lower in a downtrend.

Relative Vigor Index uses smoothening with a Simple Moving Average (SMA) over 10 periods. It places an emphasis on recent price data. There are two lines in the indicator (RVGI & Signal) which makes it useful for crossover trading.

We can also use the RVI indicator for divergence trading, if the indicator readouts do not trail the price action on the chart. For instance, if Bitcoin is going up but the indicator is not making new highs, we can expect a bearish divergence and open a short trade.

What Is The Relative Vigor Index Formula?

The simple formula for the RVI Index is RVI = (Close – Open) / (High – Low). Basically, we measure the closing minus the opening price and divide it by the highs and lows of the day. The indicator takes a numerator and a denominator based on n-values from closing prices.

Here’s the formula used on trading indicators:

rvi formula

This data is smoothened (extended) using the Simple Moving Average (SMA) over 10 periods. It is recommended to use the indicator on the daily (1D) chart for signal accuracy. As the data is purely derived from daily closes without accounting for volume, the indicator can send false signals on short-term charts such as 4H, 1H, etc.

The Relative Vigor Index was designed for the stock markets. A stock market has an opening and closing time such as 9:30AM and 4PM. This means the prices are likely going to be different. In crypto and forex markets, however, the trading occurs 24/7 and as such, we take opening prices at midnight UTC.

The calculation is similar to the way stochastic (StochRSI) and strength (RSI) indicators are calculated. If we compare RSI vs RVI, the only difference is that RSI calculates absolute values based on closing prices and RVI calculates the deviation by dividing the numerator from the denominator. The readouts on both indicators will appear similar.

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How to Use the Relative Vigor Index on Phemex?

  1. We’ll demonstrate how to activate the indicator on Phemex before we delve into reading and trading strategies. Head to “Markets” and pick any of the hundreds of trading pairs available. For example, if we pick BTC/USDT, we’ll need to open “Indicators” at the top: rvi demo 1
  2. A search window will appear where we can input “Relative Vigor Index”: rvi demo 2
  3. Left-clicking on RVI will immediately activate the indicator beneath the chart: rvi demo 3
  4. Notice we’re using the indicator on the daily (1D) chart at the top-left as recommended. The default Relative Vigor Index settings over 10 periods are ideal for crypto trading.

How to Read the Relative Vigor Index Indicator?

Reading the RVI indicator is easy: If the line is above 0, this is positive territory and if it’s below 0 it is negative territory. If the indicator hits the upper range limit of +0.5 this means the vigor of the trend is the strongest and vice versa. We will zoom-in on the chart to differentiate between the two RVI lines:

rvi demo 4

There are two lines in the indicator:

  • RVGI: The Relative Vigor line which is marked in green.
  • Signal: The Signal line which is marked in red.

The RVGI line is based on the calculation mentioned above over 10 periods. The signal line is completely separate from the indicator and is based on a 4-period Weighted Moving Average (WMA). The signal does not use the RVI formula. However, it is mandatory for trading because the crossover between these two lines indicates a trend reversal.

How to Trade With Relative Vigor Index?

The Relative Vigor Index can be used for different types of trading–divergence and cross being the most common. The indicator can also be used as a trend-confirmation indicator in combination with others such as RSI, MACD, StochRSI, etc.  The indicator is only effective in crypto trading if we’re in a strong trending market, either uptrend or downtrend.

There are two effective RVI trading strategies:

  • Crossover: The crossover between the RVGI and Signal line sends buy once the RVGI line is above the signal line, and sell signals if the Signal line is above the RVGI line. The trade is opened during the cross.
  • Divergence: If the crypto is starting a trend to the upside or downside, but the indicator is not following, we can expect a divergence in the opposite direction.

Here’s how the crossover strategy works on Bitcoin during a strong trending market:

rvi demo 5

Focus on the colors to simplify the process: if the green line crosses the red line and goes above it, this is a buy signal and a trader can open a long trade. If the red line crosses above the green line and goes above it, this is a sell signal and a trader can open a short trade. In the former we expect the price to go up and in the latter to go down.

Divergence-based trading is slightly harder because it requires attention to detail. We have to monitor how the indicator performs in relation to the price action. In the example below, we can see Bitcoin made a new high but the indicator did not make a new high which signaled we could expect a bearish divergence (downturn):

rvi demo 6

This signaled a bearish divergence as the vigor of the trend at the time was not as strong as the initial surge. A trader could preemptively open a short trade, expecting the divergence and profit on the downturn.

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Conclusion

The Relative Vigor Index is employed by traders who want to capitalize on trending markets. Instead of employing the HODL strategy, they effectively move in positions to make a profit based on the current trend. The indicator should be combined with other technical indicators such as MACD and RSI to confirm the trend.

There are limitations to the RVI indicator in crypto trading. The indicator will not be as accurate as it would be in stock trading because two things are different: 1) The opening and closing prices are different while they are the same in crypto 2) The stock markets are more predictable while crypto markets are more volatile. A trader should carefully employ this indicator when there’s a strong trend and little choppy price action. We recommend using it during bull runs and crashes to capitalize in both directions.

To learn more about technical indicators you could combine with the Relative Vigor Index, visit our Technical Analysis section.

 


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