There are plenty of indicators available on the IQ Option platform. I bet you have heard about the Relative Strength Index (if not, I invite you to read a Guide to Trading Using RSI and Support/Resistance on IQ Option). But have you ever come across the Relative Volatility Index? This is an indicator I want to present to you today.
What is the Relative Volatility Index (RVI)?
The Relative Volatility Index is quite similar to the Relative Strength Index. It was designed by Donald Dorsey and is a measure of the standard deviation of high and low prices within a specified time interval. It defines the strength of the market and ranges from values 0 to 100.
The Relative Volatility Index is rather not meant to use on its own. It requires an additional tool to confirm signals received. Most commonly it is combined with a moving average.
How to trade with the Relative Volatility Index
Donald Dorsey has invented a set of rules for trading with his indicator.
In order to open a long position, you should wait for the indicator to rise over the 50 level. However, if you fail to catch the first opportunity to enter, wait until it will be over 60. Your trade should be terminated when the indicator drops below 40.
A sell position may be opened when the RVI falls below the 50 level. If you did not manage to enter, wait for the indicator to fall below 40. Exit the trade when the indicator moves higher than 60.
These classic signals from the RVI index are unfortunately not very effective. Therefore, it is worth combining the Relative Volatility Index with other technical analysis tools.
Trading with the combination of the RVI and Fibonacci Retracement Levels
As I mentioned before, the RVI should not be used as a standalone indicator. I will show you an example of using it in conjunction with the Fibonacci Retracement Levels.
The idea is to watch price action in relation to Fibonacci Retracement Levels. You should look for the moments the price touches them and expect it to rebound or break them. The Relative Volatility Index serves as a confirmation of the entry point. Also, you can use the indicators to catch the moment to finish the transaction.
The above chart shows how after an upward wave the price stops at the most respected by the price level of 61.8%. The RVI cuts upwards through the 50 level while confirming the price return at the fibo level. This use of the indicator makes much more sense.
Final thoughts on the RVI
The Relative Volatility Index was developed as a tool to confirm trading signals. It can be used in conjunction with other indicators, for example with the Fibonacci Retracement Levels.
A general rule is to open a long position when the RVI is above 50 and a short one when it is below 50. You should close the buy transaction when the indicator drops below 40 and the sell trade should be terminated when the RVI rises over 60.
It is always beneficial to use the IQ Option demo account. You do not pay for practising there and so, without any risk, you can test how the Relative Volatility Index works. Remember though, there is no risk but no real gains neither. So once you feel confident in using a new indicator or strategy, move to the live account and start making money.
All the best!
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