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Understanding the Relative Volatility Index (RVI) RSI with Bollinger Bands
3 mins read

Introduction to Relative Volume Indicator

Importance of Volume Analysis 

Volume analysis, pioneered by Richard Wyckoff in the early 1900s, is a crucial aspect of trading and investing. It helps traders and investors understand a financial instrument’s underlying demand and supply dynamics, such as stocks, commodities, or forex. One notable advancement in this field is the introduction of the Relative Volume (RVOL) indicator, developed by J. Welles Wilder. By analyzing volume with RVOL, market participants can gauge the strength or weakness of price moves, identify potential trend reversals, and uncover lucrative trading opportunities. This invaluable technique, along with its modern enhancements, has stood the test of time since its inception by Wyckoff over a century ago.

Defining Relative Volume (RVOL) 

The Relative Volume (RVOL) indicator is a volume-based technical analysis tool that compares the volume of a given price bar to the average volume over a specified number of prior bars. RVOL measures the significance of volume changes, highlighting situations where trading activity is unusually high or low compared to historical norms. It can help traders identify potential breakouts, reversals, and other trading opportunities by providing insights into the market’s interest in a particular financial instrument.

Relative Volume

How to Calculate Relative Volume 

Steps to Calculate RVOL 

Calculating RVOL involves the following steps:

  1. Choose a lookback period, such as 50 or 100 bars, to calculate the average volume.
  2. Calculate the average volume for the chosen lookback period by adding the volume for each bar and dividing the sum by the number of bars in the period.
  3. Divide the current bar’s volume by the average volume to obtain the RVOL value.

For example, if the lookback period is 50 bars, and the average volume for that period is 10,000 shares, while the current bar’s volume is 15,000 shares, the RVOL would be 1.5 (15,000 / 10,000).

Timeframes and RVOL 

RVOL can be calculated and analyzed across various timeframes, such as intraday, daily, weekly, or monthly, depending on the trader’s preferences and objectives. However, it’s essential to note that the RVOL values will vary depending on the chosen timeframe. For instance, a daily RVOL may not be directly comparable to an intraday RVOL. Therefore, traders should remain consistent with their selected timeframe when analyzing RVOL to maintain the relevance and accuracy of their analysis.

Interpreting Relative Volume Indicator 

Trading Volume and Price Action 

RVOL helps understand the significance of volume in relation to price action. When the RVOL is above 1, it indicates that the current volume is higher than the average volume for the specified lookback period, suggesting increased interest in the financial instrument. Conversely, an RVOL below 1 suggests lower-than-average volume, indicating reduced market interest.

Higher RVOL values often coincide with significant price moves, as increased trading activity can lead to price breakouts or reversals. A rising RVOL can signify a strong trend or breakout, while a declining RVOL may indicate weakening momentum or a potential reversal.

Using RVOL to Identify Potential Trading Opportunities 

Traders can utilize RVOL to uncover trading opportunities in various ways:

  1. Breakouts: A sudden increase in RVOL accompanying a price breakout above resistance or below support levels can indicate the potential for a strong trend to develop.
  2. Reversals: A high RVOL during a price reversal, such as at key support or resistance levels, can suggest that the reversal is significant and may continue.
  3. Consolidation: Low RVOL values during price consolidation can indicate a lack of interest in the current trading range, potentially leading to a breakout once volume picks up again.

Limitations of RVOL 

While the RVOL indicator provides valuable insights into trading volume, it’s essential to be aware of its limitations:

  1. RVOL is a relative measure and doesn’t provide information on absolute volume levels. Considering overall trading volume is essential to understand the market context better.
  2. RVOL values can be influenced by external factors, such as market news or macroeconomic events, which may cause temporary spikes in volume.
  3. As with any technical indicator, RVOL should not be used in isolation but as part of a comprehensive trading strategy, incorporating other technical and fundamental analysis tools.

Example scanners and strategies that use RVOL

The Relative Volume can be used in both Scanning the market and Testing Strategies. To see how exactly it can be used in these ways, we provide the following samples. The scanner searches the market for stocks using this indicator, and the strategy tests buying and selling rules built around this indicator.

"RVOL Green Rise" scanner by TrendSpider
charts.trendspider.com
“RVOL Green Rise” scanner by TrendSpider
"RVOL Breakout Strategy #Marketplace" strategy by TrendSpider
charts.trendspider.com
“RVOL Breakout Strategy #Marketplace” strategy by TrendSpider

The Bottom Line

The Relative Volume (RVOL) indicator is a valuable tool for traders and investors seeking to understand the significance of volume changes in relation to price action. By comparing current volume levels to historical averages, RVOL can help identify potential trading opportunities, such as breakouts, reversals, and consolidations. However, it’s essential to consider the limitations of RVOL and use it in conjunction with other technical and fundamental analysis tools to develop a well-rounded trading strategy.

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Understanding the Relative Volatility Index (RVI) RSI with Bollinger Bands