What is it?
The relative volatility index (RVI) is an oscillating volatility indicator that was developed by Donald Dorsey to indicate the direction of volatility. It is similar to the Relative Strength Index (RSI), except that it measures the standard deviation of prices changes over a period rather than the absolute price changes. The RVI is plotted in a range from 0 to 100 and is often used as a confirmation for other indicators, and is often used in conjunction with Moving Average (MA) crossover signals.
How is it calculated?
The RVI is calculated in the same way as the RSI but using standard deviation of high and low prices rather than the absolute change in price.
How is it used?
The RVI designed not as a stand-alone indicator, but as a confirmation for other indicators. When the RVI is above 50 it indicates that the volatility is to the upside, and when it is below 50, it indicates that the direction of volatility is to the downside. Thus, when the RVI is above 50, it confirms a potential buy signal; and when it is below 50, it confirms a potential sell signal.
The RVI can also be used to generate potential entry signals. When the RVI moves up over 60, it can be used as a potential buy signal, and when the RVI moves down over 40, it can be uses as a potential entry for a short position, that is as a sell signal.
The RVI can also be used as an exit signal if you are already in a trade. If the RVI moves down over 40, it can be taken as a signal to close your long position, and if the RVI moves up over 60, it can be taken as a signal to cover a short position.
Donald Dorsey also state that: "There is no reason to expect the RVI to perform any better or worse than the RSI as an indicator in its own right. The RVI's advantage is as a confirming indicator because it provides a level of diversification missing in the RSI."