Relative Volatility Index (RVI) indicator was developed by Donald Dorsey. He truly understood that an indicator is not the holy grail of trading. The RVI indicator looks similar to the relative strength index. The basic difference is it measures the standard deviation (SD) of the high and low prices over a pre-defined range of periods. The Relative Volatility Index can range from 0 to 100 and unlike many indicators that measure price movement. The indicator was not designed as a standalone indicator, rather as a confirmation for trading signals. The RVI is most widely used in conjunction with moving average crossover signals.
Usage of the Relative Volatility Index (RVI) Indicator:
If traders want to know more about the Relative Volatility Index (RVI) indicator, then they can find it in the STUDIES section of Zerodha Kite. They can also use the Kite Mobile App to find out this RVI indicator. The Field is close and we can also set this. The STD Period is 10 and we can set it also. The Smoothing Period is 14 and we can change this value high and low . Check the image below to understand how to attach the RVI in HDFC Bank share price chart. You can attach this indicator on to any charts likes daily, weekly, monthly or intraday.
Formula of Relative Volatility Index Indicator:
Usum = sum (u)/n.
Dsum = sum (d)/n.
where n is bar period selected by a user.
Usum is the averaged sum of STD for positive days. If close price is above the previous close, then u = STD (n) otherwise, u = 0.
Dsum is the averaged sum of STD for negative days. If close is below the previous close, then d = STD (n) otherwise, d = 0.
Buy and Sell Signals of Relative Volatility Index:
- Buy if Relative Volatility Index (RVI) > 50.
- Sell if Relative Volatility Index (RVI) > 50.
- If trader miss the first RVI buy signal buy when RVI > 60.
- If trader miss the first RVI Sell signal sell when RVI < 40.
- When the RVI falls below 40 then close a long position.
- When the RVI rises above 60 then close a short position.
How is Relative Volatility Index used:
When the Relative Volatility Index (RVI) is above 50 it indicates that the volatility is to the upside, and when it is below 50, it indicates that the direction of volatility is to the downside. Thus, when the Relative Volatility Index is above 50, it confirms a potential buy signal; and when it is below 50, it confirms a potential sell signal.
The Relative Volatility Index (RVI) can also be used to generate potential entry signals. When the RVI moves up over 60, it can be used as a potential buy signal, and when the Relative Volatility Index moves down over 40, it can be used as a potential entry for a short position, that is as a sell signal.
The RVI can also be used as an exit signal if you are already in a trade. If the RVI moves down over 40, it can be taken as a signal to close your long position, and if the RVI moves up over 60, it can be taken as a signal to cover a short position.
Categories: Technical Indicators