Larry Connors RSI2 Mean-Reversion Strategy with Trend Filtering
Summary
The document explains a short-term mean-reversion strategy attributed to Larry Connors. It uses a long-term moving average to define the prevailing trend, then treats extreme readings in a two-period RSI as pullback or rebound signals: seek longs after oversold readings above the trend filter and shorts after overbought readings below it. The discussion describes testing RSI thresholds near the extremes, entering around the close, and considering exits near a short moving average. It also notes Connors’s finding that stop losses reduced results in his tests, while warning that omitting a stop can expose traders to large losses.
Examples using an equity ETF and Apple illustrate mixed signals, early entries, and sensitivity to market conditions. The article also describes an adapted cryptocurrency implementation with a shorter chart interval and moving average, plus a backtest claim without enough reported detail to assess costs, methodology, or robustness. RSI extremes can persist as price continues in the same direction, and the strategy’s performance depends on exit rules and market regime. Traders are advised to define risk controls and evaluate the rules for their own instruments.
Key ideas
- A long-term moving average filters RSI2 signals according to the prevailing trend.
- The strategy looks for pullback entries at extreme RSI2 readings rather than trying to call major turning points.
- The examples show that signals may arrive early and can perform differently across market phases.
- Stop-loss rules may alter historical results, but avoiding stops can permit substantial losses.
- RSI extremes can persist during strong moves, so exit design and risk controls matter.
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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.