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 index, except it measures the standard deviation of high and low prices over a defined range of periods. The RVI can range from 0 to 100 and unlike many indicators that measure price movement, the RVI does an exceptional job of measuring market 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 crossover signals.
Relative Volatility Index Buy and Sell Signals
Below are the rules that Dorsey developed for valid buy and sell signals when using the RVI:
- 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 signal sell when RVI < 40
- Close a long position when the RVI falls below 40
- Close a short position when the RVI rises above 60