Using the Relative Vigor Index (RVI) in combination with other technical indicators, a forex trading strategy may be developed to maximize gains from a long-term rally. The RVI compares the closing price to the price range and offers a measurement of the strength of up or down price movement. Higher RVI levels suggest a growing trend strength, whereas lower values signal a loss of momentum. The RVI, as a momentum indicator, often changes direction ahead of price.
Price moves back and forth in a long-term uptrend as it progresses in the direction of the broader trend. The RVI may be used by a trader who, rather than utilizing a buy-and-hold trend trading strategy, wishes to optimize earnings by moving in and out of purchase positions in accordance with the trend’s peaks and retracements.
Other technical indicators are utilized to corroborate the RVI’s trading signals. The plan is as follows:
- Once the trader has created a long position in an overall uptrend, the RVI will be watched for bearish divergence from price, which occurs when the price sets a new high but the RVI does not.
- Another technical indicator, the relative strength index, is used to confirm an oncoming regression (RSI).If the RSI readings over 70 imply overbought market circumstances, this is seen as a confirmation signal of the RVI divergence indicator. The trader profits on half of the current purchase position.
- If a pullback happens, the trader will try to re-establish the whole long position when the RVI displays a bullish divergence from price and the RSI shows oversold circumstances.
- The trader continues to take half profits before resuming a complete long position as long as the price stays above the 100-period moving average and the general uptrend is maintained (MA).The trader closes out the whole position if the price falls below the 100 MA.
(For more information, see “ForexTutorial: The ForexMarket.”)
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