Relative Volatility Index (RVI)
What is it?
The relative volatility index (RVI) is a volatility indicator that was developed by Donald Dorsey to indicate the direction of volatility. It is similar to the Relative Strength Index (RSI), except that it measures the standard deviation of prices changes over a period rather than the absolute price changes. The RVI is plotted in a range from 0 to 100 and is often used as a confirmation for other indicators, and is often used in conjunction with moving average (MA) crossover signals.
How is it calculated?
The RVI is calculated in the same way as the RSI but using standard deviation of high and low prices rather than the absolute change in price.
How is it used?
The RVI designed not as a stand-alone indicator, but as a confirmation for other indicators. When the 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 RVI is above 50, it confirms a potential buy signal; and when it is below 50, it confirms a potential sell signal.
The RVI can also be used to generate potential entry signals. When the RVI moves up over 60, it can be used as a potentail buy signal, and when the RVI moves down over 40, it can be uses as a potential entry for a short possition, 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.
Donald Dorsey also state that: "There is no reason to expect the RVI to perform any better or worse than the RSI as an indicator in its own right. The RVI's advantage is as a confirming indicator because it provides a level of diversification missing in the RSI."
Trading equities, options, derivatives, currencies, commodities or any other financial security can offer significant returns BUT can also result in significant losses if the market moves against your position. It requires a strong commitment to skill development, knowledge acquisition, and emotional control. It should be treated as a business with a clear business plan, a risk analysis, and set of attainable goals. The risk associated with trading the vagaries of the stock markets is probably the most important consideration as it has a profound effect on emotional control. You should not trade the stock markets with money you cannot afford to lose as there is considerable exposure to risk in any stock market transaction.
Furthermore, the past success of any trading method, strategy, or system is only indicative of future success. Under no circumstances should past success be construed as a guarantee of future success!
Relative Volatility Index
Volatility indicators, which measure the volatility of a security's price action, are important to day traders. When volatility increases, the price movements are more volatile and traders can gain more money in a short period of time. Some of the popular volatility indicators include J Wells Wilder's Average True Range, John Bollinger's Bollinger Bands, Chaikin's Volatility, and Relative Volatility Index (RVI).
The Chicago Board Options Exchange (CBOE) also provides a some volatility indicators, such as the S&P 500 Volatility Index (VIX), the S&P 100 Volatility ...
Relative Strength Index
The Relative Strength Index (RSI) is one of the most useful momentum indicators around and is one of the most widely used oscillating indicators. The RSI determines overbought and oversold conditions by compares the magnitude of a security's recent gains to the magnitude its recent losses.
RSI is calculated using the formula: RSI = 100 - 100/(1 - RS) where RS is (Average Gain) / (Average Loss) for the specified period. However, Average Gain and Average Loss are not true averages as they are divided by the period of the RSI. The RSI varies between 0 and 100 ...
Standard Deviation is used in statistics and probability theory and is represented by the Greek letter sigma (σ). It is calculated as the square root of variance. Variance is the average of the squared differences from the mean and is calculated by subtracting the mean from each value in the sample, squaring the result, and then dividing the sum of the results by one less than the total number of sample values.
A low standard deviation indicates that the sample values are close to the mean or the expected value, while a high standard deviation indicates that the sample values are widely spread above and below the mean.
Probability theory holds that 68.2% of all probable values will fall with in one standard deviation from the mean, 94.4% of all probable values will fall with in two standard deviations from the mean, and 99.7% of all probable values will fall with in three standard deviations from the mean.