Relative Volatility Index (RVI) – What It Is & How to Trade with It

Relative Volatility Index (RVI) – What It Is & How to Trade with It

What is the Relative Volatility Index (RVI)?

The Relative Volatility Index (RVI) is a technical momentum indicator developed by Donald Dorsey to measure the direction of volatility instead of price movements. It functions similarly to the Relative Strength Index (RSI) but focuses on volatility rather than price momentum.

The RVI formula is:
RVI = 100 × (Standard Deviation of Up Moves / Total Standard Deviation of Price Movements)

Where:

• Up Moves = Price increases over a selected period.
• Total Standard Deviation = Measures overall price volatility over the same period.
• Default setting = 14-period RVI.

Key Features of Relative Volatility Index

• Measures trend strength using volatility.
• Identifies overbought (above 60) and oversold (below 40) conditions.
• Works well in combination with trend-following strategies.

How to Use RVI in Forex Trading

1. Overbought & Oversold Strategy

RVI helps traders identify reversal points based on volatility trends:

• Buy Signal: When RVI drops below 40 and starts moving up.
• Sell Signal: When RVI rises above 60 and starts moving down.

Trading Tip: This strategy is most effective in ranging markets where price fluctuates between support and resistance.

2. RVI Trend Confirmation Strategy

RVI can help confirm whether a trend has strong volatility backing:

• Above 50: Indicates bullish momentum.
• Below 50: Indicates bearish momentum.

3. RVI Divergence Strategy

Divergence between price and RVI can indicate potential trend reversals:

• Bullish Divergence: Price forms a lower low, but RVI forms a higher low (buy signal).
• Bearish Divergence: Price forms a higher high, but RVI forms a lower high (sell signal).

4. RVI with Moving Averages

Pairing RVI with a moving average (e.g., 50 EMA) helps confirm trade signals:

• Buy when: RVI is above 50 & price is above the 50 EMA.
• Sell when: RVI is below 50 & price is below the 50 EMA.

Pros and Cons of Using Relative Volatility Index

✅ Pros:

• More reliable in volatile market conditions.
• Helps confirm trend strength before entering trades.
• Works well with other momentum indicators.

❌ Cons:

• Not useful in low-volatility markets.
• Requires additional confirmation from other indicators.

Final Thoughts

The Relative Volatility Index (RVI) is a powerful volatility-based indicator that helps traders assess trend strength, identify potential reversals, and improve trade timing. When combined with trend-following indicators like moving averages, RVI enhances trade accuracy and decision-making.