Oscillators were some of the first technical indicators created to signify overbought and oversold conditions. Formulas may differ by design, but each indicator is trying to gauge the strength and direction of a trend by observing small divergences in how investors are reacting to current price behaviour. A forex trading strategy designed to make maximum profits from a long-term uptrend can be created using the Relative Vigor Index (RVI) in conjunction with other technical indicators. The RVI compares the closing price to price range and provides a reading of the strength of price movement up or down. Higher values for the RVI indicate increasing trend strength, while lower values indicate a lessening of momentum. As a momentum indicator, the slope of the RVI often changes direction ahead of price.
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. In this trading strategy, we need two signals to enter the market. The first one comes from the RVI indicator being overbought or oversold. After we receive such a signal, we need the price to cross the SMA of the Bollinger Bands in the direction of the RVI signal. Finally, we are going to expose another trading strategy, which consists of combining the relative vigor indicator with Bollinger Bands. As you probably know, the Bollinger Bands indicator consists of a simple moving average (20-period SMA by default) and two bands – upper and lower.
Relative Vigor Index (RVI indicator)
The other period is when the RVI and signal lines cross one another. It is interpreted in the same way as many other oscillators, for example, MACD and RSI. In particular, the RVI shows when the market is overbought or oversold and sends signals when it diverges with the price chart. In this case, the two divergent periods, where the RVI is declining while prices are still increasing, might be the opposite of what a trader might expect.
- The first Green oval over the RVI space suggests a change is imminent.
- Consistency will tilt the odds in your favour and lead to a successful trading experience.
- As a momentum indicator, the slope of the RVI often changes direction ahead of price.
- Depending upon your risk tolerance level, you could exit at the last Green circle or wait for another upsurge.
- However, it is mandatory for trading because the crossover between these two lines indicates a trend reversal.
The rather large divergence periods that occur on the chart can also be confusing. With practice and experience, these signals can be interpreted correctly. The Bollinger Band strategy will produce many signals as stocks will often cross above and below the 20-period moving average. Because as a trader, avoiding overdoing it is always a great idea.
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We introduce people to the world of trading currencies, both fiat and crypto, through our non-drowsy educational content and tools. We’re also a community of traders that support each other on our daily trading journey. When the market is up (bull), the closing price is generally of a higher level than the opening price of the market, with the opposite being true for a down (bear) market.
We will demonstrate how this combination works in an actual trading example in the next section, but for now, let’s focus on the Relative Vigo Index alone to see how powerful this tool can be. The index is not one of the more popular indicators, but that does not mean it lacks accuracy.
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When a divergence appears, it can be a sign that the bullish or bearish trend is about to end. However, the main challenge for this is that divergences take a substantial amount of time to form. Finding the open and closing prices for currencies is usually relatively difficult because the forex market is usually open 24 hours for five days. Getting the data for stocks is easy because there are actual opening and closing prices every day. Similarly, moving averages allow you to assess the price action while the RVI gives you an indication of oversold and overbought conditions. This way you need actual price action to confirm the signal from the RVI oscillator.
The RVI shows an overbought market and its lines cross in a bearish direction. Also, at the same time, the price breaks the 20-period SMA of the Bollinger Bands in a bearish direction, which is our short trigger. The red line is the “trigger line” because it provides trade signals when it crosses above or below the green line. You should then calculate the simple moving averages for the numerator and denominator for the period. As you may have noted, this is a process similar to how the stochastics oscillator is calculated. As with all indicators with such lines, there are two main sections that traders watch.