Adaptive Volume-Weighted RSI (AVW-RSI)

Concept Summary

The AVW-RSI is a modified version of the Relative Strength Index (RSI), where each price change is weighted by the relative trading volume for that period. This means periods of high volume (typically driven by institutions or “big money”) have a greater influence on the RSI calculation than periods of low volume.

Why AVW-RSI Helps Traders

Avoids Weak Signals During Low Volume

1. Standard RSI may show overbought/oversold zones even during low-volume periods (e.g., during lunch hours or after news).
   
2. AVW-RSI gives less weight to these periods, avoiding misleading signals.
   
3. Amplifies Strong Momentum Moves
   
4. If RSI is rising during high volume, it's more likely driven by institutional buying—AVW-RSI reflects that stronger by weighting the RSI component.
   

Filters Out Retail Noise

By prioritizing high-volume candles, it naturally discounts fakeouts caused by thin markets or retail-heavy moves.

Highlights Institutional Entry/Exit

Useful for spotting hidden accumulation/distribution that classic RSI would miss.

How It Works (Calculation Logic)

Traditional RSI Formula Recap

RSI = 100 - (100 / (1 + RS))
RS = Average Gain / Average Loss (over N periods)

Modified Step – Apply Volume Weight

For each period

Gain_t = max(Close_t - Close_{t-1}, 0)
Loss_t = max(Close_{t-1} - Close_t, 0)
Weight_t = Volume_t / AvgVolume(N)
WeightedGain_t = Gain_t * Weight_t
WeightedLoss_t = Loss_t * Weight_t

Weighted RSI

AvgWeightedGain = SMA(WeightedGain, N)
AvgWeightedLoss = SMA(WeightedLoss, N)
RS = AvgWeightedGain / AvgWeightedLoss
AVW-RSI = 100 - (100 / (1 + RS))

Visual Features on Chart

Line Color Gradient


Color gets darker as volume weight increases, signaling stronger conviction.

Overbought/Oversold Zones

Traditional: 70/30

Suggested AVW-RSI zones: Use dynamic thresholds based on historical volatility (e.g., 80/20 for high-volume coins).

Volume Spike Flags

Mark RSI turning points that occurred during volume spikes with a special dot/symbol.

Trading Strategies with AVW-RSI

1. Weighted RSI Divergence

Regular RSI divergence becomes more powerful when volume is high.
AVW-RSI divergence with volume spike is a strong signal of reversal.

2. Trend Confirmation

RSI crossing above 50 during rising volume is a good entry signal.
RSI crossing below 50 with high volume is a strong exit or short trigger.

3. Breakout Validation

Price breaking resistance + AVW-RSI > 60 with volume = Confirmed breakout.
Price breaking but AVW-RSI < 50 or on low volume = Potential fakeout.

Example Use Case

Stock XYZ is approaching a resistance zone. A trader sees:

Standard RSI: 65 → suggests strength.
Volume is 3x the average.
AVW-RSI: 78 → signals strong momentum with institutional backing.
The trader enters confidently, knowing this isn't just low-volume hype.

Limitations / Tips

Works best on liquid assets (Forex majors, large-cap stocks, BTC/ETH).
Should be used alongside price action and volume analysis—not standalone.
Periods of extremely high volume (news events) might need smoothing to avoid spikes.