RV Indicator

This Pine Script defines a custom Relative Volatility (RV) Indicator, which measures the ratio of directional price movement to volatility over a specified number of bars. Below is a full explanation of what this script does.

Title:
RV Indicator — Relative Volatility Oscillator

Purpose:
This indicator measures how aggressively price is moving compared to recent volatility, and smooths the result with a signal line. It can be used to gauge momentum shifts and trend strength.

How It Works – Step by Step
1. Measuring Price Momentum (v1)

It calculates the difference between the close and open prices of the last 4 candles.

A weighted average is applied:

The current candle and the one 3 bars ago get weight 1.

The two middle candles (1 and 2 bars ago) get weight 2.

This creates a smoothed momentum measure:

If close > open (bullish), v1 is positive.

If close < open (bearish), v1 is negative.

2. Measuring Volatility (v2)
Similarly, it calculates the high-low range for the last 4 candles.

The same weighting (1, 2, 2, 1) is applied.

This gives a smoothed volatility measure.

3. Combining Momentum and Volatility (RV Ratio)

For the past ti bars (default: 10), it sums up:

All v1 values (momentum sum)

All v2 values (volatility sum)

Then it divides them:

𝑅𝑉= sum of price momentum % sum of volatility

This produces the RV value:

RV > 0: Momentum is bullish (price is generally moving up relative to its volatility).

RV < 0: Momentum is bearish (price is moving down relative to its volatility).

4. Smoothed Signal Line (rvsig)

A smoothed version of the RV is created using a weighted average of the latest 4 RV values.

This acts like a signal line, similar to how MACD uses a signal line.

Crossovers between RV and this signal line can be used to detect shifts in momentum.

5. Visual Output

Orange Line (RV): Shows the raw momentum/volatility ratio.

Blue Line (Signal): A smoother line that follows RV more slowly.

Zero Line: Divides bullish vs. bearish momentum.


How to Use It in Trading

1. Look for Crossovers:

If RV crosses above its signal line → Possible buy signal (momentum turning bullish).

If RV crosses below its signal line → Possible sell signal (momentum turning bearish).

2. Check the Zero Line:

If both RV and Signal are above zero, momentum is bullish.

If both are below zero, momentum is bearish.

3. Filter False Signals:

Combine RV with a trend filter (like a 50 or 200 EMA) to avoid trading against the main trend.

Disclaimer: This script is for informational and educational purposes only. It does not constitute financial advice or a recommendation to buy or sell any asset. All trading decisions are solely your responsibility. Use at your own risk.