If you are looking for an easy way to spot possible price reversals, you can plot the Relative Vigor Index (RVI) on your Forex charts.
This guide will teach you how to use crossovers and divergence to trade with the RVI. But first, we’ll explain exactly what the relative strength index is and how it’s calculated.
What is the Relative Vigor Index indicator?
The relative strength index is an oscillator. As the name suggests, its purpose is to help you visualize the relative strength of the market.
You can use it to get an idea of what’s going on with a trend and to try to gauge when a trend may be changing direction.
Key point: The RVI shows you the relative strength of a market.
How is the Relative Vigor Index calculated?
Below we will show you the formula used to calculate the relative strength index. If you are mathematically minded, you can follow it quite easily. If you’re not, it can seem intimidating.
This helps to understand the basis of the relative strength index, which is the following set of observations:
- When price is on the rise, candles tend to close higher than they open.
- When price is trending lower, candles tend to close lower than they open.
The formula for the two main lines of the indicator looks like this:
You’ll be thankful to know that you don’t have to perform these mathematical calculations yourself. If you have MetaTrader 4, this software will take care of all the calculations in the background for you when you plot the indicator on your charts.
Key point: The RVI is calculated based on how the price usually closes in uptrends and downtrends.
What does the relative strength index tell us?
When an uptrend is strong, the RVI lines also tend to move upwards. When a downtrend is strong, the reverse is true.
If you see divergencethis means that a trend may weaken, which could precede a reversal.
Key point: The RVI helps you determine the strength of a trend and whether a reversal is imminent or underway.
How do you plot the relative strength index on your charts?
You can plot the relative strength index on your Forex charts in MetaTrader in a few quick steps:
- From the top menu, navigate to Insert, Indicators, Oscillatorsso what Relative strength index.
- You can now define a period. Default is 10. You can also choose colors for the IVR and signal lines. By default, the signal line is red and the IVR line is green. You can set the minimum and maximum of the relative strength index scale in the Ladder tab if you want. When you are finished choosing IVR settings and adjustments, click OKAY.
- You will now see the relative strength index at the bottom of your chart. Normally we would have finished at this point. But if you don’t see line 0, you may need to draw it manually.
Key point: It only takes a few quick clicks to add the relative strength index to your charts in MT4.
How to use the relative strength index while trading?
Once you have plotted the relative strength index, you can use it to trade. Let’s review the two most common ways to use the IVR.
One way to trade using the Relative Strength Index is to look for crossovers between the red and green lines.
- When you see the green RVI line cross above the red signal line, this is happening underneath the horizontal zero line, which can signal the reversal of a downtrend and the start of an uptrend.
- When you see the green RVI line go below the red signal line, it happens above the horizontal zero line, which can signal the reverse of an uptrend and the start of a downtrend.
The other common way to use the relative strength index for Forex trading is to look for discrepancies between the price movement and the indicator:
- If the price has lower lows, but the RVI lines have higher lows, it is a bullish divergence. This means that the price may be about to reverse and start an uptrend.
- If the price has higher highs, but the RVI lines have lower highs, it is a bearish divergence. This means that the price may be about to reverse and turn lower.
Key point: You can use the RVI in your trading by looking for divergences or crossovers.
General tips for using the relative strength index
- Avoid using the relative strength index in mixed markets. The relative strength index produces its most reliable results in markets characterized by strong trends. If you’re trying to use it in a wide market, you’re more likely to be fooled by scroll saws.
- Use other indicators or price action. Because no indicator is 100% reliable, including the Relative Strength Index, it is best to use this in conjunction with one or more other indicators or tools. Alternatively, you can use it in combination with price action. If the RVI and a price pattern are both giving you reversal signals, then you have established a confluence and you have a potential setup.
- Always perform tests. However you decide to use the Relative Strength Index, you should perform backtests and demo tests before trading real money. This also applies to any adjustments you make to the period or to the maximum and minimum of the RVI scale.
Key point: Like any other indicator, the relative strength index has its limitations. The tips above can help you get around them.
The relative strength index helps you enter reversals. The indicator makes it easy to visualize the relative energy of the markets. By looking for crossovers or divergences, you can enter new trends at reversal points.
For best results, use it in a variety of markets, look for confluence, and thoroughly test your trading method on a demo before releasing it live.
You can discuss the Relative Vigor Index indicator and its application in Forex trading on our forum for traders.
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