ConnorsRSI�Pullback Strategy�Review
OC Traders Meeting
April 27, 2013
ConnorsRSI�Pullback Strategy�Review
All of the disclosures you have read about trading and different trading strategies apply to this review.
Basically, you’re on your own.
ConnorsRSI�Pullback Strategy�Review
CONFESSION
As much as I would like to back test and, ultimately trade, ConnorsRSI, I haven’t because of my inability to spend the time – “life” just seems to get in the way!
ConnorsRSI�Pullback Strategy�Review
All of the information reviewed today has been derived from a publication, �An Introduction To ConnorsRSI by Connors Research, LLC
You can obtain a free copy (I hope) from the following link.
ConnorsRSI�Pullback Strategy�Review
http://www.tradingmarkets.com/media/2012/ConnorsRSI-Pullbacks-Guidebook.pdf?utm_source=CRSIPDF1&utm_medium=MarketoEmail&mkt_tok=3RkMMJWWfF9wsRonuKvIZKXonjHpfsX56%2B8uWKa3lMI%2F0ER3fOvrPUfGjI4AScJrI%2FqLAzICFpZo2FFMEuWWc45O9edODFO9TSs%3D
ConnorsRSI�Pullback Strategy�Review
OR….., I’ll provide a pdf of
An Introduction to ConnorsRSI
from
Connors Research Trading Strategy Series
(Look for posting on xsProfits)
Pullback Strategy Review
• Pull backs occurs when a security has been� moving higher sells off and the price drops
• Most traders use daily bars, although some� trade intraday, and others trade longer-term
• You are looking for the underlying that has� pulled back too far but has a propensity� to regain the upward trend
• Looking for movement known as � mean reversion
Pullback Strategy Review
• Best results occur when holding a position� for at leasat a few days
• Stock often pull back sharply and snap back� strongly – there’s no way of knowing how� far the upward move will be
• It’s crucial to have well-defined exit rules in� place – and that they are quantified
ConnorsRSI
(While it is a momentum oscillator, �it is different than just using the Wilder’s RSI)
(It’s a more robust indicator – short term trading)
Combines 3 different components
to provide an indicator with a �0-100 range.
(You overlay the ADX indicator �for confirmation – more on this later)
ConnorsRSI
Combines 3 different components
• Price RSI (default: 3 period RSI)� Referred to as RSI[Close,3]
ConnorsRSI
Combines 3 different components
• Price RSI (RSI[Close,3])
• Length of the current � up streak or down streak for a� duration value� (Default is a 2-period RSI)� (Referred to as RSI[Streak,2])
ConnorsRSI
• A 2-period RSI of the length of the� current up streak or down streak.
The default is RSI2 – denoted as � RSI[Streak,2] for Streak Duration value
Example
ConnorsRSI
Combines 3 different components
• Price RSI (RSI[Close,3])
• Length of the duration value of the� current up streak or down streak� (RSI[Streak,2])
• Most recent price change compared� to historical changes by ranking it� against 100 previous price� changes – measured as %’s, not $
The Percent Rank Value is the number of values in the look-back period that are LESS than the current value – divided by the total number of values.
Example
Assume: today’s return @ 2.0%; using a 20 look-back period; three days with values of less than 2.0%.
Percent Rank = 3/20 = 0.15 or 15%
ConnorsRSI
The final calculation determines the �average of the component values.
Thus ConnersRSI (3,2,100) = �(RSI[Close,3] + RSI[Streak,2] + �%Rank[100]) / 3
This formula supplies the ConnorsRSI �value with a reading from 0-100. Zero �being oversold & 100 as over bought.
ConnorsRSI
Combining averages of the three components produces a blending effect; a strong value from one indicator compensates for a weaker value from another component.
ConnorsRSI�Pullback Strategy�Review
THE RULES
• The Introduction Guide presents� quantified rules for entering and� exiting trades.
• Different variations, with different� performances, are offered for� consideration
• Select the variation that best� complements your own strategy
THE RULES FOR ENTRY/EXIT
#1: Stock above $5 per share
(Comment: Helps steer clear of “penny stocks” and other highly volatile, unpredictable companies. Though never guaranteed, they found it a good floor price for selecting more stable stocks.)
THE RULES FOR ENTRY/EXIT
#2: Average daily volume� 250,000 shares min over� past 21 days
(Comment: Assures the stock is highly liquid, with tight bid/ask spreads.)
THE RULES FOR ENTRY/EXIT
#3: Stock’s 10-day ADX � (Average Directional Index)� is above 30
(Comment: Confirms recent strength or trend. ADX is non-directional and will quantify a trends strength regardless of up or down.
The default setting is 10.)
THE RULES FOR ENTRY/EXIT
#4: Today the stock’s lowest � price is at least 2% below� previous day’s close (or – 4%,� 6%, 8% – higher is better)
(Comment: Identifies a basic pullback – a significant sell-off measured as a % of the previous closing day’s price.
Low price, not the close price, tells us the stock faltered in a meaningful way.)
THE RULES FOR ENTRY/EXIT
#5: Today’s close is in the� bottom 10%-25% of the� day’s trading range
(Comment: Visibility into today’s price action. Calculated as Closing Range = [close-low]/[high-low.])
THE RULES FOR ENTRY/EXIT
EXAMPLE
Assumes: Today’s Close @ $12.05
Today’s Low @ $12.00
Today’s High @ $12.50
Range = (12.05-12.00)/12.50-12.00) =� .05/.50 - .10 or 10%
Shows no significant recovery – good indicator price likely to fall further tomorrow.)
THE RULES FOR ENTRY/EXIT
#6: Connors RSI (3,2,100)� value is below 5% � (or – 6%, 7%...15%)
(Comment: The key is to determine the quality of the pullback. Their research has shown the lower the RSI value the larger the bounce is likely to be when the stock recovers.)
THE RULES FOR ENTRY/EXIT
#7: If Rules 1-6 are met today, buy� tomorrow on a further intraday� limit 4% (or – 6%, 8%, 10%)� below today’s closing price
(Comment: Allows entering trade at an optimal price. It’s already oversold and we’re waiting to become even more oversold. Second day drop creates fear; panic helps create opportunity.)
THE RULE FOR EXIT
#8: Exit position when stock� closes with a target RSI� value of 50% ( or – 60%,� 70%, 80%)
(Comment: This is a well defined exit method, a strategy that is quantified, structured and disciplined.)
(Their research showed that rarely did RSI exit readings exceed 80-85%.)
ConnorsRSI – MTL Example
#1
#2
#3
#4
#7
#6
#8
#5
#4
(Rule 3: 48.62)
(Rule 6: 2.91)
(Rule 5: Was 18%)
(Rule 7: Set up day close $5.91 @ 8% = $5.44 actually fell to $5.42)
(Rule 8: Over 70)
ConnorsRSI – MTL Example
#1
#2
#3
#4
#7
#6
#8
#5
#4
(Rule 4: Was over 30%)
(Rule 5: Was under 10%)
(Rule 6: Was 2.55 on set up day)
(Rule 7: Set up day close $9.97 @ 4% = $9.37 – actually fell to $8.20)
(286,704 avg vol)
(Rule 8: Over 70)
(Rule 3: 51.60)
ConnorsRSI
TEST RESULTS REVIEW
(Note: Winning % is 70% for this example)
ConnorsRSI
TEST RESULTS REVIEW
(Rule 4)
(Rule 5)
(Rule 6)
(Rule 7)
(Rule 8)
ConnorsRSI
TEST RESULTS REVIEW
(Rule 4)
(Rule 5)
(Rule 6)
(Rule 7)
(Rule 8)
ConnorsRSI
TEST RESULTS REVIEW
(Rule 4)
(Rule 5)
(Rule 6)
(Rule 7)
(Rule 8)
ConnorsRSI
This is what is known from the research data compiled from 2001 to Sept 2012:
• Majority of moves from entry to exit� have been held a very short period� of time – 2-7 days.
• Average gains per trade have been� large – well beyond normal� distribution of prices over that short� period of time.
• A high percentage of the moves have� been correct.
ConnorsRSI
Can be used for trades such as:
• Stocks
• Indexes
• ETF’s (including leveraged &� inverse)
• Options
ConnorsRSI
Based on the short term trade behavior, the preferred option strategy is:
Buy the front month, ITM long calls
ITM Calls will move closest to the stock itself. The closer an option moves with the stock, the greater the gain will be on a % basis when the move is correct.
(Claims that this strategy has been confirmed by professional traders.)
ConnorsRSI
The Option trade RULES:
• A signal triggers (Rules 1-7 are� aligned & filled)
• Buy front month ITM – if normally� buy 500 shares, but 5 option contracts
• Buy one to two strikes ITM
• Sell when the signal triggers � ConnorsRSI Exit Rule #1
ConnorsRSI
The Option trade RULES (continued):
• If closest month is 7 days or less, use� the following month
• Use discretion on liquidity
• Look for tight spreads
• If option is about to expire and the exit� signal hasn’t been triggered, roll out to� the next month – you’re trading stock� signals so you want to have exposure to� that signal.
ConnorsRSI
Trading with buying Call Options:
I must admit I’m skeptical�about buying call options!
How much will volatility & Theta�affect/impact the trade if the exit signal is hit but the price move�isn’t sufficient?�(not to mention slippage & commissions)
ConnorsRSI
WHAT SUBJECT WAS NOT TALKED ABOUT?
…What’s the EXIT RULE if the trade goes � against you?
What stops (if any) should be used?
• IBD suggest – if stock drops 8%, get out
• Previous presentations – no more� than 50% of the “money on the table”
• Other suggestions? (Personally, I use� mental stops)
ConnorsRSI
Protective stops…
You can find research on stops �in other publications including �their book:
Short-Term Trading Strategies �That Work
(Hint, hint)
Comparison-ConnorsRSI To RSI2
Both are oscillators with values �between 0 and 100
Zero being oversold condition
100 being overbought condition
One question: How often might these conditions occur?
Comparison-ConnorsRSI To RSI2
Comparison-ConnorsRSI To RSI2
RSI responds very quickly and decisively to price changes a shown in the 5-point “slices”
Indicator spends more time at the extremes
The distribution of values doesn’t form the familiar bell-shaped curve of a normal distribution
Comparison-ConnorsRSI To RSI2
When RSI is calculated with longer look-back periods using the same 5-point “slices”, �the distribution of values does approximate �a bell curve.
Let’s look at RSI3 & RSI14 examples…
Comparison-ConnorsRSI To RSI2
Comparison-ConnorsRSI To RSI2
Now for a distribution chart for ConnorsRSI
Notice the distinct peaks around the �5-point “slices” of 20-30 (oversold) and �also 70-80 (overbought)
Values below 10 and above 90 are much less likely to occur than with RSI2
Comparison-ConnorsRSI To RSI2
Comparison-ConnorsRSI To RSI2
Next, let’s compare the average 5-day returns between ConnorsRSI and RSI2
Notice that the return is substantially greater for ConnorsRSI for most of the 5-point “slices”
Comparison-ConnorsRSI To RSI2
Comparison-ConnorsRSI To RSI2
Comparison-ConnorsRSI To RSI2
Hopefully the different perspectives on ConnorsRIS will help you to develop a better sense of how the indicator generally behaves.
Combining this understanding with historical test results and you own trading, you’ll be �able to more fully leverage the power of ConnorsRSI
ConnorsRSI(3,2,100) Code�Available For�• TOS/TDA�• TradeStation�• AmiBroker
ConnorsRSI Code For TOS/TDA
ConnorsRSI
Ta Da!
THE END