INDICATORS
Something Old, Something New
Relative Vigor Index (RVI)
by John F. Ehlers
Here's an old concept brought to light using modern filters to make
it a practical, useful indicator.
Since the inception of STOCKS & COMMODITIES
(happy 20th anniversary year!), there have been several developments in
technical analysis that have merged old concepts with new technologies.
Like the magazine itself, the indicator discussed here will also be merging
the old and new. The relative vigor index (RVI) uses concepts dating back
to the beginning of this magazine and also uses modern filter and digital
signal processing theory to realize those concepts as a practical and useful
indicator.
The idea behind the RVI is basic -- prices tend to close higher than
they open in up markets and close lower than they open in down markets.
The vigor, or energy, of the move is thus established by where the prices
end up at the close. To normalize the index to the daily trading range,
divide the change of price by the maximum range of prices for the day.
Thus, the basic equation for the RVI is:
RVI = (Close-Open) / (High-Low)
As you can see, the formula resembles that of an oscillator.
HISTORICAL PERSPECTIVE
In 1972, Jim Waters and Larry Williams published a description of their
accumulation/distribution oscillator. They defined buying power
(BP) and selling power (SP) as:
BP = High - Open
SP = Close - Low
in which prices were the open, high, low, and closing prices for the
day. The two values, BP and SP, show the additional buying strength relative
to the open and the selling strength relative to the close to obtain an
implied measure of the day's trading. They combined the two and referred
to it as the daily raw figure (DRF), which is calculated as:
DRF = (BP + SP)/[2*(High - Low)]
When the low of the trading day is at the open and the close is at the
high, the maximum value of 1 is reached. Conversely, the minimum value
of zero is reached when the market opens trading at the high and closes
at the low. When you're evaluating day-to-day movement, it causes the DRF
to vary radically, making it difficult to apply. This makes it necessary
to smooth the results. Before doing so, however, you need to expand the
equation as follows:
DRF = 1/2 [(High-Open+Close - Low) / (High-Low)]
= 1/2 [(High-Low+Close - Open) / (High-Low)]
= 1/2 [1+(Close-Open) / (High-Low)]
Clearly, the equation for DRF is identical to the daily RVI expression,
with the only difference being the additive and multiplicative constants.
However, the RVI is easier to smooth using modern filter theory. That is
where modernization comes in.
Figure 1: The difference between the close and
open is at a maximum at the ascending area of the cycle.
...Continued in the January 2002 issue of Technical Analysis of STOCKS
& COMMODITIES
Excerpted from an article originally published in the January
2002 issue of Technical Analysis of STOCKS & COMMODITIES magazine.
All rights reserved. © Copyright 2001, Technical Analysis, Inc.
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