The RVI is a technical indicator of the momentum of prices by comparing the closing price of an asset to its trading range. It reflects the strength of a trend because it analyzes if the price closes higher or lower than it opens. In an uptrend, for example, prices tend to close higher than they open, while in a downtrend, prices close lower.
The RVI then uses a simple moving average to smooth out the result and plot what is known as a signal line. Traders normally look for crossovers between the RVI and signal line as potential opportunities for buying or selling.
How is RVI Calculated?
The RVI calculation is in several steps:
- Numerator: The closing price minus the opening price.
- Denominator: The total range between the high and low prices over a given period.
- RVI: Ratio between numerator and denominator.
- Signal Line: A simple moving average of the values of the RVI, which helps in smoothing out volatility and trends.
In this way, traders can plot the RVI and signal line on a chart to visualize the price momentum over time.
Strategy to RVI Backtested
This article will show one trading strategy based on the RVI, using a backtest on GLD, which tracks the price of gold. The strategy is simple yet effective, offering a clear framework for executing trades.
Strategy Rules
The rules of the backtested Strategy are:
Buy Signal:
- The RVI has crossed above the signal line.
- The RSI of 5-day RVI is below 50.
Sell Signal:
- The signal line has crossed above the RVI.
This means that dual-condition trading will filter out the weak signals and increase the likelihood of success on the trades taken.
Backtest Results
The backtest results on GLD show that the strategy brings in very promising results:
- Average Gain Per Trade: 0.44%
- Win Rate: 51%
This makes it one of the most effective ways out there, as while the win rate might be just moderate, winners usually come in much larger than losses. This, of course, creates a positive risk-reward ratio that would eventually, over time, make that same strategy profitable.
Does the Strategy Work on Other Assets?
The strategy seems to work quite well with the GLD, while with other assets, like the S&P 500 or bonds, the performance is not that impressive. That would imply the RVI strategy could be asset-specific, as different assets do have their own particular ways of behaving in the market.
Nevertheless, the fact that that works on GLD certainly hints that the strategy might not be curve-fitted. It simply underpins the importance of the knowledge in asset-specific dynamics when applying trading strategy.
Implications for Traders
The RVI strategy back-testing can be helpful for anyone looking for a precise yet simple way to reflect on momentum in the markets-of the kind like gold, shown earlier. Here follows some action steps from which traders at every level could profit if adopting this strategy.
1. Identifying Momentum
It gives one an insight into the RVI, whether it is in an uptrend or a downtrend; hence, one should go with the trend. The use of the signal line crossover gives clear entry and exit points for traders to take decisions.
2. Effective filtering around RSI.
Adding the secondary condition of RVI 5-day RSI below 50 enables the filtering out of weaker signals and, therefore, improving the probability of success in trades. A filter of this type would prevent traders from getting into trades in overbought or oversold conditions.
3. Risk-Reward Ratio
This strategy has a very good risk-to-reward profile, with an average win rate: the average gain per winning trade being greater than the loss in case of a losing trade. Traders can use position sizing or adjust their leverage to better suit their preferences for risk.
4. Asset-Specific Strategy
These results of the backtest insinuate that with some underlining assets, the strategy will work great, but with others, it may not. This is important for traders to consider when applying the RVI strategy to various markets. Traders should experiment with different assets to identify those that best align with the strategy’s behavior.
Conclusion
The Relative Vigor Index is one of the most powerful momentum indicators, and it is a presentation of what can be expected from an RVI-based backtested strategy in creating profitable trades. Especially for Gold, a simple and at the same time efficient set of rules enables traders to effectively use the crossover of RVIs along with the RSI conditions for filtering trade opportunities.
Key takeaways:
- The RVI strategy can often reliably identify momentum in markets.
- This would further include an RVI 5-day RSI below 50, which would improve the trade quality by filtering out the weaker signals.
- This strategy works really well on assets like GLD but may not work so well with others, such as the S&P 500.
- Improved knowledge of such dynamics lets traders shape and mold the strategy according to changes in the market conditions to receive better results.
- Keep in mind that successful trading is an ongoing process of testing and adjusting to ever-changing market conditions.