What it means
The indicator was introduced by John Ehlers, a technical analyst known for applying signal processing ideas to markets. It looks at each trading period, which could be a day or an hour, and records how far the close is from the open, then divides that by the distance between the high and the low.
A strongly positive reading means buyers have been in control for most of the period. To reduce noise, the raw readings are smoothed using a weighted average of the last four periods, with the two middle periods counting double.
The smoothed values are then added up over a window, commonly ten periods, to produce the RVI line. A second line, the signal line, is a smoothed version of the first, and crossovers between the two are used as trading cues.
In practice, an analyst watches for the RVI line crossing above its signal line as a sign that upward momentum is building, and crossing below as a sign it is fading. Readings that diverge from the price, for example the price making a new high while the RVI fails to, can warn that a trend is losing steam.
The signals are most useful in clear trends and less reliable in choppy, sideways markets. Finance professionals outside trading rarely need the detail, but the indicator is worth understanding if you read technical research from brokers or advisers.
It belongs to the family of oscillators (indicators that move up and down around a central line), alongside the Relative Strength Index and stochastic oscillators. Like all of them, it describes what prices have done and does not forecast anything with certainty.
The main caution is that indicators built from past prices can lag, and they can produce false signals around news events. Most practitioners combine the RVI with other tools, such as trend lines or volume, rather than relying on one signal.
In practice
Real-world examples.
Example
A currency trader sees the RVI cross above its signal line while the euro is trading at a three-week high. She treats this as confirmation that the upward move has real momentum and holds her position. She places a stop below the recent low to protect against a false signal.
Example
An equity analyst notices that a share price has reached a new high, but the RVI has been lower on each successive peak. He writes in his note that buyers are less forceful than the price suggests. The client reduces exposure ahead of the next results.
Example
A commodity fund manager uses the RVI on daily charts of copper to time when to add to a position. When the indicator stays negative for several days she delays buying, even though the price looks cheap. This avoids buying into a downtrend that is still gathering pace.
Formula
Calculation
Raw value for each period = (Close - Open) / (High - Low)
Smoothed value = (A + 2B + 2C + D) / 6, where A is the latest period and D is the oldest of four
Suppose the last four periods have Close minus Open of 2.0, 1.0, 3.0 and 2.0 (latest first), and High minus Low of 4.0, 3.0, 5.0 and 4.0. Smoothed numerator = (2.0 + 2 x 1.0 + 2 x 3.0 + 2.0) / 6 = 12 / 6 = 2.0. Smoothed denominator = (4.0 + 2 x 3.0 + 2 x 5.0 + 4.0) / 6 = 24 / 6 = 4.0. RVI reading at this point = 2.0 / 4.0 = 0.50, a clearly positive value. In the full indicator the smoothed numerators and denominators are each summed over ten periods before dividing.Case study
Seen in the real world.
Ridgeway Trading Desk is an illustrative, fictional proprietary trading team that tests indicators before using them with firm capital. The head of the desk asked a junior analyst to test whether the Relative Vigor Index could improve entry timing for a basket of liquid shares.
The analyst found that signal line crossovers gave useful guidance in trending months but frequent false signals in sideways ones. Over a year, the strategy beat a simple buy and hold approach in trending periods and lagged it in flat ones.
The head of the desk decided to use the RVI only as a filter alongside a trend measure. The illustrative lesson was that an indicator can be valuable and still need to be paired with another tool that tells you when to trust it.
Watch out
Common mistakes.
- Treating every crossover of the RVI and its signal line as a guaranteed buy or sell instruction.
- Confusing the Relative Vigor Index with the Relative Strength Index, which uses a different calculation and scale.
- Using the indicator in sideways markets, where its signals flip back and forth and produce losses.
Questions
People also ask.
What does a positive RVI mean?
It means prices have tended to close higher than they opened, which suggests buyers have been in control, though it says nothing about future direction.
Who created the Relative Vigor Index?
It was developed by John Ehlers, who also designed several other technical indicators.
What settings are typical?
A ten-period window with four-period weighted smoothing is the common default, but traders adjust it to suit the time frame they trade.
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