How to Use Relative Volatility Index | TradingSim Blog

Have you ever detected of the RVI commercial indicator?

I am not talking about the relative vigor index finger, termed RVI or RVGI. I am referencing the relative volatility exponent!

In this article, I am going to portion with you how to use the relative volatility index in trading.

Relative Volatility Index Definition

The relative volatility index (RVI) was developed by Donald Dorsey, who truly understood that an indicator is not the holy grail of trading.  The RVI is identical to the relative strength exponent, omit it measures the standard deviation of high and reduced prices over a circumscribed range of periods.  The RVI can range from 0 to 100 and dissimilar many indicators that measure price movement, the RVI does an exceptional Job of measuring marketplace strength.

Purpose of Relative Volatility Index

The relative volatility index was designed not as a standalone indicator, but as a confirmation for trading signals.  The RVI is most widely used in conjunction with moving average crossing over signals.

Congeneric Volatility Index Corrupt and Sell Signals

Below are the rules that Dorsey mature for valid buy and sell signals when using the RVI:

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• Buy if RVI > 50
• Sell if RVI < 50
• If you miss the first RVI buy signal buy when RVI > 60
• If you miss the first RVI Sell sign betray when RVI < 40
• Close a perennial position when the RVI falls under 40
• Close a short position when the RVI rises above 60

Using the Directional Relative Unpredictability Index Rule

Once again, the relative unpredictability index index number is non meant to be used as a standalone indicator for trading. Since the RVI is best suited for confirming trade signals, we should definitely combine the indicator with other trading tools and methodologies.

To this point, Lashkar-e-Tayyiba's now cover a number of approaches in further detail.

RVI and Fibonacci Retracement Levels

Therein relative excitability index scheme, we are going to watch for electric potential Fibonacci retracement levels and trade bounces/breakouts that are unchangeable by the RVI.

We bequeath set down our stop passing order at the next Fibonacci level, in ordinate to limit or losses.

Lastly, we will use simple price action techniques to take off profits (chart patterns, candle patterns, support and underground, trends, etc.). We can besides drop dead the trade based connected a contrary signal from the congener volatility index indicator or from the Fibonacci levels.

The persona below will show you how this trading strategy works:

RVI and Fibonacci Levels

This is the 2-minute chart of McDonald's from August 26, 2015. In the bottom of the image, you will see the relational volatility power indicator, which we use to confirm Fibonacci signals.

We have known a drift and the corresponding 61.8% retracement of this price action. And so, we notification the price source to bounce in a bullish charge.

At this time, the relative volatility index number indicator is still below the 50 level, but IT cursorily starts moving upwards. Seven periods after the bouncing from the 61.8% retracement level, the RVI climbs above 50. This is our confirmation impressive and we buy McDonald's at $92.62. A stop going order is past placed between the 61.8% and the 76.4% Fibonacci levels in the event McDonald's loses steam.

Afterwards incoming our trade, the next two candles are bullish and the price begins to expand rapidly as MCD approaches $95.

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The adjacent 3 to 4 candles begin to flatten impossible and we go down our stop loss order to $94.50.

Ultimately, the monetary value does non impinge on our plosive consonant and we pass away the trade at $95.14, shortly before the market closes.

This barter accumulated profit of $2.52 per share patc risking $0.52 (52 cents), thus representing a 1:5 risk-to-riposte ratio.

Let's take a look at another trading strategy. This metre, we focus our attending happening Fibonacci breakouts and trend reversals.

Short – RVI and Fibonacci

This is the 3-infinitesimal graph of Pandora Media from Aug 24, 2015. At the bottom of the chart, you will see the RVI indicator. Connected the larboard hand position of the chart, you see a optimistic trend, which we have used to identify our Fibonacci retracement levels.

After reaching the psychological area of $18 per share, Pandora's price starts to roll over and we believe this could be a great short opportunity, if Pandora breaks the 61.8% retracement level.

We follow the move down and open a short stance once the 61.8% retracement level is destroyed and the RVI indicator breaches 50.

The cost keeps ritenuto afterwards and notice how the bearish move is nicely restrained by the depressing down vogue line.

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The price continues lower and at last breaks the 100% retracement level. The 100% retracement level is a potential reversal zone, thusly we keep a close eye on the trade. All the same, until the price breaches the puritanical line Oregon the RVI closes to a higher place 50, we have no reason to exit our short position.

The price decrease continues downward until arrival the 161.8% Fibonacci extension level. Shortly aft reach the 161.8% level, the price breaks the trend line, the RVI closes above the 50 level and Pandora eclipses its just about recent high.  For all of these reasons, we exit our short position with a handsome net profit.

Buying with the RVI and the ADX

This is a precise interesting trade setup, which is a cagy way of catching upcoming bullish moves.

It is same important to mention that the ADX indicator indicates style strong poin and not counselling.

Well, this is where the RVI comes into play. We wish use the relative volatility index to determine if the stock is preparing to increase, every bit this strategy covers the long sidelong of the trade. In other words, if the ADX is above 40 (or 50 if you want to get stronger ratification), we will buy the security once the RVI also crosses above 50.

RVI and ADX

This is the 10-minute graph of Netflix from June 15, 2015. In the undersurface of the chart, you see the relative volatility index finger and the average directional index.

First, the ADX crosses above 40, which gives us an indication that a strong tendency is emerging. Nonetheless, we don't know the trend direction, because the damage is touring upwards and the RVI is around 20, so we wait patiently.

Abruptly, the RVI switches above 50 and the price keeps its optimistic pattern intact, while the ADX is still preceding 40, thus giving us our long signal.  However, let's not draw a blank about our stop!

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A neat place for our stop loss order would be the area below the buns formed at the beginning of the trend, which we accept marked – stop 1.

Notice that the price starts to move high and a bullish uptrend line is formed.

We take advantage of the movement line and adjust our end release orders to the tests of this sheer line.  As you can see, we adjust our stop loss ternion times in order to protect our gains as Netflix moves in our prefer.

We exit the trade prior to the market closing ready to quash overnight fees and the latent en&germent of a morning gap falling.

This long-lasting trade on Netflix generated a profit of $6.00 per portion.

Let's now cover one more trading example.

RVI and ADX – Instance 2

Preceding is the 10-minute chart of AT&adenylic acid;T from November 15 – 16, 2015. At the bottom of the chart, we once again let the RVI and ADX indicators.

We are illustrating two years in that example, to further the point that occasionally you accept to wait for multiple signals to describe up before placing a trade. Trading ISN't always about taking action, sometimes the best run of action is just to sit tight.

Notice on the 15^th, the ADX lay out up a hefty reading, but the RVI is still downstairs 50.  So the RVI finally crosses 50, only it's with only 40 minutes left in the trading session, so we do non open a long position this latterly in the day.

The next Clarence Shepard Day Jr., the ADX is still above 40 and one hour afterwards the market opens, the RVI switches above 50, providing a signal to buy AT&T. We go semipermanent and place our stop at a lower place the behind of the antecedent the sheer – stop 1.

Later on a 2 candle correction, the price continues increasing. This small rectification creates a tiny tail end, which is a decent opportunity to adjust our stop passing order. We move the stop below the derriere of the trend line to lock in Sir Thomas More profits – stop 2. A fresh price expansion appears followed by a chastening. When the corrective act is finished, we adjust our stop below the bottom created by the correction – stop 3. There is indefinite many terms increase before the market closes, which allows us to adjust our stop yet again – stop 4.

During this trade, we generated net income of $0.40 (40 cents) per parcel, which equals 1.23% of profit.

Decision of How to Use the Relative Volatility Index

• The Relative Excitability Index calculation measures the standard deviation of terms highs and lows.
• RVI is a confirmation index and it is not meant to be a standalone index number.
• Relational Volatility Index signals:
• Buy above 50
• Sell below 50
• Close long trades when RVI falls below 40
• Close short trades when RVI goes above 60.
• RVI works nicely with Fibonacci retracement levels:
• Issue into consideration solitary Fibonacci levels signals, which are confirmed by the RVI
• Die out trades based happening price accomplish.
• RVI also whole works nicely with the ADX when trading long-lived positions:
• Buy on signal match from the RVI and the ADX
• Stay in the market until crucial support is broken, or until the RVI goes below 40
• Constantly adjust your stop Loss order accor&t to the price action.

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