Relative Volatility Index (RVI)
period = 14 (10–20) • std_period = 10 (5–14) Overview
The Relative Volatility Index represents a unique approach to technical analysis by applying the RSI formula to standard deviation instead of price changes. Dorsey recognized that since most indicators use price change for calculations, traders needed a confirming indicator using different measurements to validate signals. RVI accomplishes this by measuring the standard deviation of up periods versus down periods - when today's close is higher than yesterday's, it's an up period, and vice versa. The resulting oscillator ranges from 0 to 100, providing insights into whether volatility is expanding in the direction of the current trend.
What makes RVI particularly valuable is its independence from direct price movements, making it an excellent confirming indicator. By focusing on volatility direction rather than price direction, RVI can validate or question signals from traditional indicators. Dorsey specifically designed it to work alongside moving average crossover systems, where RVI readings above 50 confirm bullish signals and readings below 50 confirm bearish signals. This complementary nature allows traders to filter false signals that might occur when price-based indicators agree but volatility patterns suggest otherwise.
Interpretation & Trading Signals
Primary Signal Levels:
- Above 50: Bullish volatility direction, uptrend confirmation
- Below 50: Bearish volatility direction, downtrend confirmation
- Above 70-80: Overbought conditions, potential selling opportunity
- Below 20-30: Oversold conditions, potential buying opportunity
Confirmation Strategies:
- MA Crossovers: Confirm moving average signals with RVI direction
- Divergences: Price/RVI divergences signal potential reversals
- Filter Signals: Only take trades when RVI agrees with primary indicator
- Volatility Shifts: RVI crossing 50 indicates volatility regime change
Usage Guidelines:
- Not Standalone: Designed as confirming indicator, not primary signal
- Market Strength: Measures volatility-based strength, not price strength
- Best With Trends: Most effective in trending markets with clear direction
- RSI Alternative: Can be used wherever RSI is used, but with volatility focus
Example Usage
Code examples will be available once the Rust implementation is complete.