What Is The Relative Volatility Index Indicator & How To Trade With It

Relative Volatility Index

Relative Volatility Index (RVI) was developed by Donald Dorsey, not as an independent trading indicator but as a confirmation of the trading signals. It was first introduced in the journal “Technical Analysis of Stocks and Commodities” in June 1993. The redesigned indicator appeared in September 1995.

What is Relative Volatility Index (RVI)?

The Relative Volatility Index is similar to the Relative Strength Index (RSI) but it shows the maximum and minimum prices of the standard deviation in a particular range. The Relative Volatility Index can range from 0 to 100 and, unlike many indicators, does not show price movement, but rather measures its strength.

The RVI is calculated in much the same way as the Relative Strength Index, but instead of price changes for calculations, a 10-day standard deviation of close price is taken here.

Relative Volatility Index on chart
Relative Volatility Index on chart

Relative Volatility Index formula

S = Stddev [10 days] – standard deviation for a 10-day period

U = S if price> prev price – if the price is higher than the price in the previous period

U = 0 if price <prev price otherwise

EMA [W14] from U

RVIorig = 100 * ————-

EMA [W14] from S

EMA [W14] – exponential moving average in 14 days

RVIorig of highs + RVIorig of lows

RVI = ——— ————————-

RVIorig of highs – Relative Volatility Index highs

RVIorig of lows – Relative Volatility Index lows

If the data source does not provide high/low accuracy values, then StdDev for ten days is replaced by default with EMA for 14 days.

How to use Relative Volatility Index indicator?

The relative volatility index was developed not as a separate indicator, but as a confirmation of trading signals. It was created to measure the direction of movement of volatility. It is most widely used in combination with a moving average; it does not repeat the signals of oscillators (RSI, MASD, stochastic oscillator, rate of change, etc.), but can be used to confirm them. Dorsey believed that many trading systems could be improved by using this indicator as a filter.

You can use the overbought and oversold areas to trade using the Relative Volatility Index. For this, you have to observe in the history of the chart to find the areas of oversold and overbought. For example, the chart below shows that 65 is the overbought area while 35 is the oversold area.

Relative Volatility Index overbought - oversold
Relative Volatility Index overbought – oversold

You can use the Relative Volatility Index to spot price divergence and trade it. Divergence appears when there is disagreement between the direction of price and the indicator.

Relative Volatility Index bullish divergence
Relative Volatility Index bullish divergence

Relative Volatility Index trading strategy

A simple trading strategy is presented here. However, you may add other trend trading indicators for further information.

Relative Volatility Index buy strategy

  • You can buy if the Relative Volatility Index is above 50.
  • If the first buy signal is missed, we can buy it when the Relative Volatility Index is above 60.
  • We could close a long position when the Relative Volatility Index falls below 40.
Relative Volatility Index buy setup
Relative Volatility Index buy setup

Relative Volatility Index sell strategy

  • An asset can be sold if the Relative Volatility Index is below 50.
  • If the first sell signal is missed, then we could sell when the Relative Volatility Index is below 40.
  • We could close a long position when the relative volatility index rises above 60.
Relative Volatility Index sell setup
Relative Volatility Index sell setup

Relative Volatility Index conclusion

The relative volatility index measures other indicators of market dynamics compared to other indicators. Dorsey believed that “there is no reason to expect the Relative Volatility Index to be better or worse than the RSI, as an indicator. Its advantage is that it (a confirmation indicator) considers the levels of diversification lost by the RSI.”

The Relative Volatility Index indicator can be used on your trading platform charts to help filter potential trading signals as part of an overall trading strategy.

I would prefer to use the majority of technical indicators such as the Relative Volatility Index indicator on the 1-hour charts and above. I tend to find that these charts contain less market noise than the lower time frames and thus give more reliable signals for my forex trading strategies. This also means that I spend less time staring at charts and can also set alert notifications to let me know when price has reached certain levels or a particular indicator value has been reached.

The Relative Volatility Index indicator is just one indicator amongst thousands. I would not build a trading system alone, but rather combine with other technical indicators such as moving averages, Parabolic SAR, Stochastic Oscillator, RSI, ADX and price action analysis.

Of course, every trading system will generate false signals which is why money management is so important. I would personally be implementing sensible money management and only take traders that give me a favorable risk to reward ratio, ideally of at least 1:3. This means that one losing trade does not wipe out consecutive winners.

The methods of implementing the Relative Volatility Index indicator into a trading strategy that are outlined within this article are just ideas. I would always ensure that I have good money management, trading discipline and a trading plan when using any forex strategy.

Furthermore, I would combine multiple technical analysis, fundamental analysis, price action analysis and sentiment analysis to filter all entries. You should trade forex in a way that suits your own individual style, needs and goals.

If you would like to practice trading with the Relative Volatility Index indicator, you can open an account with a forex broker and download a trading platform. If you are looking for a forex broker, you may wish to view my best forex brokers for some inspiration.

Happy trading!