Mean reversion
Connors RSI(2)
Larry Connors’s short-term mean reversion strategy: if the market is above its 200-day average and the two-day RSI has dropped below 10, a bounce is more likely than a further fall.
Rules
- Trend: a close above SMA 200.
- Pullback: the 2-candle RSI below 10.
- Exit: a close above SMA 5.
Code for the lab
level = input(10, 2, 30, 1) trend = sma(close, 200) quick = sma(close, 5) r = rsi(close, 2) plot trend, quick buy when close > trend and r < level sell when close > quick
You can change the code right in the lab: the numbers in input(…) become sliders.
Results on eight markets
| Market | CAGR | Drawdown | Trades | Buy and hold: CAGR | Buy and hold: drawdown |
|---|---|---|---|---|---|
| MOEX Russia Index | — | — | — | — | — |
| Sberbank | — | — | — | — | — |
| Gazprom | — | — | — | — | — |
| Gold, $ per ounce | — | — | — | — | — |
| Brent crude, $ per barrel | — | — | — | — | — |
| Bitcoin | — | — | — | — | — |
| Ether | — | — | — | — | — |
| VN-Index | — | — | — | — | — |
| Market | CAGR | Drawdown | Trades | Buy and hold: CAGR | Buy and hold: drawdown |
|---|---|---|---|---|---|
| MOEX Russia Index | — | — | — | — | — |
| Sberbank | — | — | — | — | — |
| Gazprom | — | — | — | — | — |
| Gold, $ per ounce | — | — | — | — | — |
| Brent crude, $ per barrel | — | — | — | — | — |
| Bitcoin | — | — | — | — | — |
| Ether | — | — | — | — | — |
| VN-Index | — | — | — | — | — |
The numbers are calculated in your browser from fresh source candles.
Default parameters, daily candles, a fee and slippage of 0.05% each per trade, no return on cash out of the market, prices without dividends. The test starts once all of the rule’s indicators are calculated.
What research says
Connors and Alvarez described the rule in their book “Short Term Trading Strategies That Work” (2009) and tested it themselves on US stocks over 1995–2007, without costs. No independent academic tests were found.
A high share of winning trades (about two thirds in our table) does not mean a high return: the strategy is out of the market most of the time, and the average trade is small.
Original source: Connors, Alvarez. Short Term Trading Strategies That Work. TradingMarkets, 2009 (ISBN 978-0-9819239-0-1)
When the rule breaks
- A crash without a bounce: the rule buys every dip, and there is no stop.
- Costs: the average trade is small, and the fee eats a noticeable part of it.
- In the Absolute lab experiments on crypto, RSI2 won 59% of its trades and still lost 16%.