Developed by Donald Dorsey, the Relative Volatility Index is the Relative Strength Index (RSI) only with the standard deviation over the past 10 days used in place of daily price change. Use the RVI as a confirming indicator as it makes use of a measurement other than price as a means to interpret market strength.
The RVI measures the direction of volatility on a scale from zero to 100. Readings >50 indicate that the volatility is more to the upside. Readings <50 indicate that the direction of volatility is to the downside. Initial testing by Dorsey has indicated that the RVI can be used in the same way as the RSI.
When testing the profitability of a basic moving average crossover system, Dorsey found results could be significantly enhanced by the application of a few rules:
- Only buy if RVI >50.
- Only sell if RVI <50.
- If you missed the buy at 50, buy long if RVI >60.
- If you missed the sell at 40, sell short if RVI <40.
- Close a long if RVI falls <40.
- Close a short if RVI rises >60.