In our last post we introduced the Relative Vigor Index. It is a momentum indicator that, in contrast to normal momentum, does not just compare the closing price difference of a certain period, but rather relates the range between lows and highs as well as opening and closing prices. In addition, the indicator is also smoothed with a signal line, i.e. a moving average is calculated on it.
The interpretation of the indicator was also not very complex. There is the zero line, the indicator line and the signal line that should be observed. We noticed that the signals that the indicator generates according to the general rules of interpretation should rather be seen as price-confirming. So the indicator is lagging most of the time.
This led us to conclude that the Relative Vigor Index should be used in a similar way to the RSI indicator, so it is less the direction that it indicates and more important what tendencies it shows. And with that we come back to the famous divergences or confirmations of the course itself.
Strategy with the Relative Vigor Index
With this knowledge we can now start to develop a strategy. In the last post, we already set up three rules that can generate more or less good signals.
- There must be a divergence between price and indicator.
- The turnaround is accelerating and the zero line is broken.
- After breaking the zero line, the indicator remains strong.
Unfortunately, despite the already optimized rules, not every signal was reliable. Admittedly, anyone who expects 100% reliable signals in trading did not understand what it was all about. Courses are not exclusively dominated by market technology, but are subject to unexpected risks, which mostly arise for political or fundamental reasons. The question that should be asked is therefore not "How do I get a 100 percent reliable signal?", But rather "How can I counter the unexpected risks?"
So let's take a look at the current DAX -Chart with the RVI indicator, then we will see the following. If we use the three rules above to get started, in many cases it will be too late, because once the zero line is exceeded or undershot, the medium-term trend is already very advanced.
And if so If we take a closer look, crossing the zero line was accompanied by a countermovement even in the majority of cases. That is extremely unsatisfactory. We must therefore consider whether we should not reject this rule, which we will do. Since the third rule arises from the second, unfortunately this one cannot be used for our purposes as well. So the only rule that can be used for us is RVI divergence.
Divergence is particularly useful in short-term trading, because short-term strategies don't expect big trends anyway. So if we focus on using divergence as the primary signal, all we need is to break through an important zone to continue to confirm the emerging weakness. The whole thing could work - with options of at least one hour.
The upper chart shows the 1-hour chart of the DAX index. The first divergence can send us a good signal. We are still waiting for the upward trend to break through. If this takes place, we basically have two options: either we immediately buy an option with a term of one hour or we wait for the retest. In the first case, both options would have been successful. If we look at the second divergence, no relevant zone can be immediately identified. This came later; by then the RVI divergence was already resolved. In some cases, it makes sense to stand still and not to act.
Conclusion - trade RVI with simple means
How we turn it around, there are no 100% reliable signals. In the end, you should always remember the simple things, because there are always only a few that are really reliable. The best way to use the indicator depends on your personal preferences.
On the one hand, you can use other indicators for optimization or just use simple technical setups. However, it should be generally accepted that indicators such as the RVI can reliably indicate emerging weakness in the trend.
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