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The majority of technical trading indicators use the rate of change of security prices in their calculation. The Relative Volatility Indicator or RVI, uses a different time-series, it uses the volatility trend, which is calculated using the standard deviation of the security close price, to measure and evaluate market strength.
The relative volatility index uses the same calculation as the relative strength index (RSI). However, instead of using the close price, its formula uses the standard deviation of the past 10 bars/days. Like the RSI, this technical analysis indicator returns a value comprised between 0 and 100, where a value that is higher than 50 signify that the direction of the volatility is more on the upper side, while a value that is lower than 50 signify that the direction of the volatility is more on the lower side. The RVI can be interpreted as being bullish for the market or the stock if its value is higher 50 or 60 and bearish if the value is lower than 50 or 40.
The relative volatility index was developed by Donald Dorsey who also developed and created the Mass Index Indicator that is used to predict reversals in security prices. The current function is named "RVI"; it accepts a parameter that defines the lookback period or the number of bars to use in the calculation of the RVI. The period is the same as the one used to calculate the relative strength index.
For example, to calculate the relative volatility index using a lookback period of 14 bars:
a = rvi(14);
The volatility, which is calculated using the standard deviation of the close prices, always use a period of 10 bars. However, you can update the formula and add another parameter to the RVI to control the number of bars used by the standard deviation.
Trading financial instruments, including foreign exchange on margin, carries a high level of risk and is not suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to invest in financial instruments or foreign exchange you should carefully consider your investment objectives, level of experience, and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with trading and seek advice from an independent financial advisor if you have any doubts.
