To The Moon

As we have seen how volatile market have been on the first week of 2024, one way to measure volatility breakouts is through technical indicators, such as the average true range (ATR), which tracks how much an asset typically moves in each price candlestick.

Average True Range (ATR)

A sharp rise in the ATR can alert traders to potential trading opportunities, as it most likely indicates that a strong price movement is underway and there will be a breakout.

Only when the ATR crosses above the simple moving average is there is a potential trade. The price should also be breaking above or below recent swing highs or lows for better opportunity. This helps to filter the times when the ATR crosses the moving average, yet the price does not move significantly.

The average true range is a particularly effective tool for tracking how much an asset is moving, on average, for each price bar.

But I would like to share on another indicator, The Relative Volatility Index (RVI) in this article and how we can make use of it in Tradingview to help us.

Relative Volatility Index (RVI) Short Description

The relative volatility index (RVI) was developed by Donald Dorsey. The RVI is identical to the relative strength index, the only difference is that the RVI is calculated using the standard deviation and not the absolute prices.

The RVI can range from 0 to 100 and unlike many indicators that measure price movement, the RVI does an exceptional job of measuring market strength.

What Do We Understand By Volatility

For beginners, we could often see volatility being refers to as the overall rate of change of asset prices.

For example, if a stock remains unchanged for a month, it can be said to have low volatility. On the other hand, if it opens at $100, rises to $200, falls below $120, and then rises to $210 in a single session, it is said to have high volatility.

Some stocks are known for their high volatility. These includes penny stocks which are thinly traded, Actions of a single individual can have a major impact on the stock.

Therefore, the Relative Volatility Index (RVI) is an indicator that seeks to identify the direction of the volatility of a stock’s price. The chart below shows the RVI applied in $Marathon Digital Holdings Inc(MARA)$ , a crypto stock.

In addition to the RVI, other indicators used to measure or show volatility are the Average True Range (ATR) - as mentioned above, Historic Volatility, and even Bollinger Bands.

How To Interpret Relative Volatility Index (RVI)

Here are some rules that Dorsey had developed for valid buy and sell signals when using the RVI.

Below are the rules that Dorsey developed for valid buy and sell signals when using the RVI. But we do need to remember that RVI is not very accurate when used alone. I will show you an example on how we can determine when to buy a stock using RVI and ADX.

How To Find a BUY with RVI and ADX

This is a very interesting trade setup, which is a smart way of catching upcoming bullish moves.

It is very important to mention that the ADX indicator indicates trend strength and not direction.

Well, this is where the RVI comes into play. We will use the relative volatility index to determine if the stock is preparing to increase, as this strategy covers the long side of the trade. In other words, if the ADX is above 40 (or 50 if you want to get stronger confirmation), we will buy the security once the RVI also crosses above 50.

$NVIDIA Corp(NVDA)$ Trade Using RVI and ADX

This is the 15-minute chart of Nvidia from 29 Dec 2023. In the bottom of the chart, you see the relative volatility index and the average directional index.

First, the ADX crosses above 40, which gives us an indication that a strong trend is emerging. However, I do not know the trend direction, because the price is moving upwards and the RVI is below 20, so I wait patiently.

Suddenly, the RVI switches above 50 and the price keeps its bullish pattern intact, while the ADX is still above 40, thus giving me a long signal.  However, we need to remember our stop loss level!

A great place for our stop loss order would be the area below the bottom formed at the beginning of the trend, which I have marked as STOP 1.

Notice that the price starts to move higher and a bullish uptrend line is formed. I took advantage of the trend line and adjust my stop loss orders to the tests of this trend line. 

As you can see, I have adjusted my stop loss three times in order to protect my gains as Nvidia moves in our favor, before we see it trading sideways.

I exit the trade as both the RVI trend below 50 and ADX stay below the 40 level. This long trade on Nvidia generated a profit of $10.00 per share.

Summary

So in summary this is what we have learned about Relative Volatility Index, and it measures the standard deviation of price highs and lows. RVI is a confirmation indicator and it is not meant to be a standalone indicator.

As shown in the Nvidia trade example, we could Buy when RVI is above 50, and sell when it is below 50, which I close the long trade when RVI falls below 40

RVI also works nicely with the ADX when trading long positions, we could Buy on signal match from the RVI and the ADX. Do stay in the market until crucial support is broken, or until the RVI goes below 40

We should constantly adjust our stop Loss order according to the price action.

Appreciate if you could share your thoughts in the comment section whether you think RVI is useful to be used with other indicator for trading volatility.

I will try to show another example when I have the chance to use RVI and ADX combined to trade the stock.

@TigerStars @Daily_Discussion @Tiger_Earnings @TigerWire appreciate if you could feature this article so that fellow tiger would benefit from my investing and trading thoughts.

Disclaimer: The analysis and result presented does not recommend or suggest any investing in the said stock. This is purely for Analysis.