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A forex trading strategy designed to make maximum profits from a long-term uptrend can be created using the Relative Vigor Index (RVI) in conjunction with other technical indicators. The RVI compares the closing price to price range and provides a reading of the strength of price movement up or down. Higher values for the RVI indicate increasing trend strength, while lower values indicate a lessening of momentum. As a momentum indicator, the slope of the RVI often changes direction ahead of price.
In a long-term uptrend, there are back-and-forth movements of price as it advances in the direction of the overall trend. The RVI can be employed by a trader who, rather than using a buy-and-hold trend trading strategy, wants to maximize profits by moving in and out of buy positions in accord with peaks and retracements that occur within the trend.
Other technical indicators are used to confirm trading signals given by the RVI. The strategy is as follows:
- Once the trader has a long position established in an overall uptrend, the RVI will be monitored for bearish divergence from price, meaning the price makes a new high, but the RVI does not make a corresponding new high.
- Confirmation of an impending retracement is sought by using another technical indicator, the relative strength index (RSI). If the RSI indicates overbought conditions in the market by readings above 70, this is taken as a confirming signal of the RVI divergence indication. The trader takes profit on half of the existing buy position.
- Assuming a retracement occurs, the trader looks to re-establish the full long position when the RVI shows a bullish divergence from price and the RSI indicates oversold conditions.
- The trader continues taking half profits, then resumes a full long position while the overall uptrend remains intact, as determined by the price remaining above the 100-period moving average (MA). On a close below the 100 MA, the trader closes out the entire position.
(For further reading, see “Forex Tutorial: The Forex Market.”)