Oscillator Indicator: Relative Volatility Index (RVI)
The Relative Volatility Index (RVI or Relative Volatility Index) is a volatility indicator developed by Donald Dorsey to indicate the direction of volatility. This is similar to the Relative Strength Index (RSI), except that it measures the standard deviation of price changes over a period rather than absolute price changes.
RVI is plotted in the range 0 to 100 and is often used as a confirmation for other indicators. Also often used in conjunction with crossover signals with moving average (MA).
RVI is calculated in the same way as RSI but uses high and low price deviation standards rather than absolute price changes.
RVI is designed not as a stand-alone indicator, but as a confirmation for other indicators. If the RVI above 50 indicates that the volatility to the upside, and when it is below 50, this indicates that the volatility direction to the downside. Thus, when RVI is above 50, this confirms a potential buy signal; and when it is below 50, this confirms a potential sell signal.
RVI can also be used to generate potential incoming signals. As the RVI moves up more than 60, it can be used as a potential buy signal, and vice versa when RVI moves down more than 40, can be used as a potential entry level for short holdings, ie as a sell signal.
RVI can also be used as an exit level if you already have a trading position. If the RVI moves down more than 40, it could be considered as a signal to close your buying position, and if the RVI moves up above 60, it could be considered as a signal to close the sell position.
Donald Dorsey also stated that: “There is no reason to expect RVI to perform better or worse than RSI as its own indicator The RVI advantage is a convincing indicator because it provides the level of diversification lost at RSI.”