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ConnorsResearchTradingStrategySeries

AnIntroductionto
ConnorsRSI
2
nd
Edition
By
ConnorsResearch,LLC
LaurenceConnors
CesarAlvarez
MattRadtke
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Copyright 2014, Connors Research, LLC.



ALL RIGHTS RESERVED. No part of this publication may be reproduced, stored in a
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publisher are not engaged in rendering legal, accounting, or other professional service.

Authorization to photocopy items for internal or personal use, or in the internal or
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U.S. $7.00 per page fee is paid directly to Connors Research, LLC, 1-973-494-7333.

ISBN 978-0-9899857-0-3

Printed in the United States of America.

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Disclaimer

By distributing this publication, Connors Research, LLC, Laurence A. Connors, Cesar Alvarez, and Matt
Radtke (collectively referred to as Company") are neither providing investment advisory services nor
acting as registered investment advisors or broker-dealers; they also do not purport to tell or suggest
which securities or currencies customers should buy or sell for themselves. The analysts and employees
or affiliates of Company may hold positions in the stocks, currencies or industries discussed here. You
understand and acknowledge that there is a very high degree of risk involved in trading securities and/or
currencies. The Company, the authors, the publisher, and all affiliates of Company assume no
responsibility or liability for your trading and investment results. Factual statements on the Company's
website, or in its publications, are made as of the date stated and are subject to change without notice.

It should not be assumed that the methods, techniques, or indicators presented in these products will be
profitable or that they will not result in losses. Past results of any individual trader or trading system
published by Company are not indicative of future returns by that trader or system, and are not indicative
of future returns which be realized by you. In addition, the indicators, strategies, columns, articles and all
other features of Company's products (collectively, the "Information") are provided for informational and
educational purposes only and should not be construed as investment advice. Examples presented on
Company's website are for educational purposes only. Such set-ups are not solicitations of any order to
buy or sell. Accordingly, you should not rely solely on the Information in making any investment. Rather,
you should use the Information only as a starting point for doing additional independent research in order
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You should always check with your licensed financial advisor and tax advisor to determine the suitability
of any investment.

HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN INHERENT
LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT
REPRESENT ACTUAL TRADING AND MAY NOT BE IMPACTED BY BROKERAGE AND OTHER
SLIPPAGE FEES. ALSO, SINCE THE TRADES HAVE NOT ACTUALLY BEEN EXECUTED, THE
RESULTS MAY HAVE UNDER- OR OVER-COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN
MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING PROGRAMS IN
GENERAL ARE ALSO SUBJ ECT TO THE FACT THAT THEYARE DESIGNEDWITH THE BENEFIT OF
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Table of Contents
Section1TheConnorsRSIIndicator.........................................................5
Section2ConnorsRSIBasePerformance...............................................10
Section3ConnorsRSIPullbackStrategyRules.......................................14
Section4TheRoleofExits.....................................................................21
Section5TestResults............................................................................24
Section6TradingOptionsUsingtheConnorsRSIPullbackStrategy......30
Section7AdditionalThoughts...............................................................34
AbouttheAuthor...................................................................................37


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Section1
TheConnorsRSI
Indicator


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ConnorsResearchhasbeendeveloping,testing,andpublishingquantifiedtradingstrategiessincethe
mid1990s.Duringthattime,wehavehadtheopportunitytoevaluateagreatnumberofdifferent
technicalindicatorsandtoassesstheireffectivenessinpredictingfuturepriceaction.Nowwevetaken
thenextstepandcreatedanindicatorofourown:ConnorsRSI.Thepurposeofthisguidebookisto
describetheindicatoritselfandalsotoprovideawelldefined,quantifiedtradingstrategythatutilizes
thisnewindicator.
ConnorsRSIisacompositeindicatorconsistingofthreecomponents.Twoofthethreecomponents
utilizetheRelativeStrengthIndex(RSI)calculationsdevelopedbyWellesWilderinthe1970s,andthe
thirdcomponentranksthemostrecentpricechangeonascaleof0to100.Takentogether,thesethree
factorsformamomentumoscillator,i.e.anindicatorthatfluctuatesbetween0and100toindicatethe
leveltowhichasecurityisoverbought(highvalues)oroversold(lowvalues).
BeforewediscusshowtocalculateConnorsRSI,letsreviewWildersRSI.RSIisaveryusefuland
popularmomentumoscillatorthatcomparesthemagnitudeofastock'sgainstothemagnitudeofits
lossesoversomelookbackperiod.Wilderhimselfbelievedthat14periodswastheideallookback.We
oftenusetheshorthandnotationRSI(14)forthe14periodRSI.TheformulabelowcomputesRSI(14)for
aseriesofpricechanges:

IfwewantedtocomputeRSIforadifferentnumberofperiods(N),thenwewouldreplace14inthe
formulaabovewithN,andreplace13withN1.Regardlessofthenumberofperiodsusedinthe
calculation,theresultwillalwaysbeanumberbetween0and100.TraderswhouseRSI(14)typically
lookforvaluesgreaterthan70toidentifyoverboughtconditions,andvalueslessthan30toindicate
oversoldconditions.
OurpreviousresearchhasshownthatusingshorterlookbackperiodsmakesRSImoreeffectivein
predictingshorttermpricemovements.WehavepublishedmanystrategiesthatutilizeRSI(2),aswell
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asseveralthatuseRSI(3)andRSI(4).ChangingthenumberofperiodsalsohasaneffectontheRSIlevels
thatbestidentifyoverboughtandoversoldconditions.Forexample,anRSI(2)valueoflessthan10is
usuallyareliableindicatorofanoversoldcondition,whileanRSI(2)valueover90isagoodbenchmark
foranoverboughtcondition.
NowletsturnourattentionbacktoConnorsRSI.Asmentionedpreviously,ConnorsRSIcombinesthree
components,andasyoumightguess,theyareallelementsthatourresearchhasrepeatedlyshownto
havesignificantpredictiveability:
PriceMomentum:Aswejustdiscussed,RSIisanexcellentwaytomeasurepricemomentum,
i.e.overboughtandoversoldconditions.Bydefault,ConnorsRSIappliesa3periodRSI
calculationtothedailyclosingpricesofasecurity.WewillrefertothisvalueasRSI(Close,3).
DurationofUp/DownTrend:Whentheclosingpriceofasecurityislowertodaythanitwas
yesterday,wesaythatithascloseddown.Ifyesterdaysclosingpricewaslowerthanthe
previousdaysclose,thenwehaveastreakoftwodownclosedays.Ourresearchhasshown
thatthelongerthedurationofadownstreak,themorethestockpriceislikelytobouncewhen
itrevertstothemean.Likewise,longerdurationupstreaksresultinlargermovesdownwhen
thestockmeanreverts.Ineffect,thestreakdurationisanothertypeofoverbought/oversold
indicator.
Theproblemis,thenumberofdaysinastreakistheoreticallyunbounded,thoughwecould
probablyplacesomepracticallimitsonitbasedonpastexperience.Forexample,wemight
observethattherehavebeenveryfewinstancesofeitheranupstreakoradownstreaklasting
formorethan20days,butthatstilldoesntgetustoatypicaloscillatortypevaluethatvaries
between0and100.
Thesolutionistwofold.First,whenwecountthenumberofdaysinastreak,wewilluse
positivenumbersforanupstreak,andnegativenumbersforadownstreak.Aquickexample
willhelptoillustratethis:
Day ClosingPrice StreakDuration
1 $20.00
2 $20.50 1
3 $20.75 2
4 $19.75 1
5 $19.50 2
6 $19.35 3
7 $19.35 0
8 $19.40 1

TheclosingpriceonDay2ishigherthanonDay1,sowehaveaonedayupstreak.OnDay3,
thepricecloseshigheragain,sowehaveatwodayupstreak,i.e.theStreakDurationvalueis2.
OnDay4,theclosingpricefalls,givingusaonedaydownstreak.TheStreakDurationvalueis
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negative(1)becausethepricemovementisdown,notup.Thedownwardtrendcontinueson
Days5and6,whichourStreakDurationreflectswithvaluesof2and3.OnDay7theclosing
priceisunchanged,sotheStreakDurationissetto0indicatingneitheranupclosenoradown
close.Finally,onDay8theclosingpricerisesagain,bringingtheStreakDurationvalueback
to1.
ThesecondaspectofthesolutionistoapplytheRSIcalculationtothesetofStreakDuration
values.Bydefault,ConnorsRSIusesa2periodRSIforthispartofthecalculation,whichwe
denoteasRSI(Streak,2).Theresultisthatthelongeranupstreakcontinues,thecloserthe
RSI(Streak,2)valuewillbeto100.Conversely,thelongerthatadownstreakcontinues,the
closertheRSI(Streak,2)valuewillbeto0.Thus,wenowhavetwocomponentsRSI(Close,3)
andRSI(Streak,2)thatbothusethesame0100scaletoprovideaperspectiveonthe
overbought/oversoldstatusofthesecuritywereevaluating.
RelativeMagnitudeofPriceChange:ThefinalcomponentofConnorsRSIlooksatthesizeof
todayspricechangeinrelationtopreviouspricechanges.WedothisbyusingaPercentRank
calculation,whichmayalsobereferredtoasapercentile.Basically,thePercentRankvalue
tellsusthepercentageofvaluesinthelookbackperiodthatarelessthanthecurrentvalue.
Forthiscalculation,wemeasurepricechangenotindollarsandcents,butasapercentageof
thepreviousdaysprice.Thispercentagegainorlossistypicallyreferredtoastheoneday
return.Soifyesterdaysclosingpricewas$80.00,andtodayspriceis$81.60,theoneday
returnis($81.60$80.00)/$80.00=0.02=2.0%.
TodeterminethePercentRank,weneedtoestablishalookbackperiod.ThePercentRank
valueisthenthenumberofvaluesinthelookbackperiodthatarelessthanthecurrentvalue,
dividedbythetotalnumberofvalues.Forexample,ifthelookbackperiodis20days,thenwe
wouldcomparetodays2.0%returntotheonedayreturnsfromeachoftheprevious20days.
Letsassumethatthreeofthosevaluesarelessthan2.0%.WewouldcalculatePercentRankas:
PercentRank=3/20=0.15=15%
ThedefaultPercentRanklookbackperiodusedforConnorsRSIis100,orPercentRank(100).We
arecomparingtodaysreturntotheprevious100returns,orabout5monthsofpricehistory.
Toreiterate,largepositivereturnswillhaveaPercentRankcloserto100.Largenegative
returnswillhaveaPercentRankcloserto0.
ThefinalConnorsRSIcalculationsimplydeterminestheaverageofthethreecomponentvalues.Thus,
usingthedefaultinputparameterswouldgiveustheequation:
ConnorsRSI(3,2,100)=[RSI(Close,3)+RSI(Streak,2)+PercentRank(100)]/3
Theresultisaveryrobustindicatorthatismoreeffectivethananyofthethreecomponentsused
individually.Infact,ConnorsRSIalsoofferssomeadvantagesoverusingallthreecomponentstogether.
Whenweusemultipleindicatorstogenerateanentryorexitsignal,wetypicallysetatargetvaluefor
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eachone.Thesignalwillonlybeconsideredvalidwhenalltheindicatorsexceedthetargetvalue.
However,byusinganaverageofthethreecomponentindicators,ConnorsRSIproducesablendingeffect
thatallowsastrongvaluefromoneindicatortocompensateforaslightlyweakervaluefromanother
component.Asimpleexamplewillhelptoclarifythis.
LetsassumethatTraderAandTraderBhaveagreedthateachofthefollowingindicatorvaluesidentify
anoversoldcondition:
RSI(Close,3)<15
RSI(Streak,2)<10
PercentRank(100)<20
TraderAdecidestotaketradesonlywhenallthreeconditionsaretrue.TraderBdecidestouse
ConnorsRSItogenerateherentrysignal,andusesavalueof(15+10+20)/3=15asthelimit.Now
assumewehaveastockthatdisplaysthefollowingvaluestoday:
RSI(Close,3)=10
RSI(Streak,2)=8
PercentRank(100)=21
ConnorsRSI=(10+8+21)/3=13
TraderAwillnottakethetrade,becauseoneoftheindicatorsdoesnotmeethisentrycriteria.
However,TraderBwilltakethistrade,becausethetwolowRSIvaluesmakeupfortheslightlyhigh
PercentRankvalue.Sinceallthreeindicatorsareattemptingtomeasurethesamething
(overbought/oversoldconditionofthestock)bydifferentmechanisms,itmakesintuitivesensetotake
thismajorityrulesapproach.Moreimportantly,ourresearchhasshownConnorsRSItobesuperiorto
anyothermomentumindicatorthatwevetested.

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Section2
ConnorsRSIBase
Performance

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Withanyindicatorthatyouuseinyourtrading,itishelpfultoknowhowtheindicatorbehaves,and
whatitstellingyouaboutthesecurityprice.OurgoalwithConnorsRSIwastodevelopasuperior
momentumoscillatorwhichwouldproducelowvaluesforoversoldstocksandETFs,andhighvalues
whenthosesecuritiesareinanoverboughtstate.
Todeterminewhetherwehadachievedourgoal,weranthefollowingtest.Wecreatedauniverseof
approximately6,000highlyliquidstocks.StartingonJanuary2,2001,welookedforeverystockinthe
universewhichhadthefollowingcharacteristicsonthatday:
1. Atleast200daysoftradingdataavailable
2. Averagedailyvolumeoverthepast21daysofatleast500,000sharesperday
Eachstockthatmetourcriteriawasplacedinoneoftwentydifferentbucketscorrespondingtoits
ConnorsRSIvalueatthecloseoftradingonthatday.StockswithConnorsRSI(3,2,100)valuesoflessthan
5wentintothe0bucket.ThosewithConnorsRSI(3,2,100)valuesgreaterthanorequalto5andless
than10wereplacedinthe5bucket,etc.allthewayuptothe95bucket,whichcontainedstockswith
ConnorsRSIvaluesof95to100.Thisprocesswasrepeatedforeverytradingdaythrough
February28,2014.
Next,foreachofthe20bucketswecalculatedthefivedayreturnofeachstockforeverydayinthetest
period,andaveragedthosevalueswithineachofthe20buckets.Insimpleterms,wedeterminedthe
typical5daypricemove(asapercentage)ofastockwhoseConnorsRSIvaluefellintoaparticular
bucket.
Weexpectedthatstocksthatwereoversold(thosewithlowConnorsRSIvalues)wouldincreaseinprice,
whilethosethatwereoverboughtwoulddecreaseinprice.Asyoucanseeinthetablebelow,thisis
exactlywhathappened.

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ConnorsRSI(3,2,100)
Bucket 5DayReturn
0 2.15%
5 1.16%
10 0.65%
15 0.54%
20 0.37%
25 0.27%
30 0.29%
35 0.25%
40 0.21%
45 0.16%
50 0.33%
55 0.36%
60 0.24%
65 0.22%
70 0.15%
75 0.08%
80 0.07%
85 0.06%
90 0.28%
95 0.94%

YoucanseethatastheConnorsRSIvaluegoesbelow20,the5dayreturnsbegintoincrease
substantially.StockswithaConnorsRSIvalueintherangeof0to5(the0bucket)experiencedan
averagepriceincreaseof2.15%overthenextfivetradingdays.
WeseetheinversebehavioratthetopendoftheConnorsRSIrange:asthevaluemovesabove80,the
5dayreturnsareincreasinglynegative,withstocksinthe95bucketshowinga0.94%pricedecrease
overthefollowingfivedays.
Forthoseofyouwhoaremorevisuallyoriented,thechartbelowshowsthesameinformationasthe
tableabove:
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NowthatwevelookedatConnorsRSIinisolation,letsmoveontotheConnorsRSIPullbackStrategy
rulestoseehowtheindicatorperformsaspartofacompletesystem.


1.50%
1.00%
0.50%
0.00%
0.50%
1.00%
1.50%
2.00%
2.50%
0 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 95
5DayReturnofStockswith
aConnorsRSI(3,2,100)ValueofX
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Section3
ConnorsRSIPullback
StrategyRules


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Pullbacktradingisoneofthemostpopularformsoftradingamongsttraders.Thegoodnewsisthat
whenitsdonecorrectlyitcanbeverylucrative.Thenotsogoodnewsisthatoverthepasttwodecades
therehasbeenaproliferationofpublishedpullbackstrategieswhichhavelittleornoedgeatall.
InthisStrategyGuide,wewillpresentastrategywhichutilizesConnorsRSIincombinationwithother
indicatorstoidentifywhenapullbackhasoccurred.Eachoftheseindicatorsandtheircontributionto
thestrategywillbedescribedinthenextchapter.Multipleexittriggerswerealsotested,allowingyou
toselectavariationofthestrategythatcomplementsyouroveralltradingplan.
Beforewegoon,letslookatexactlywhatapullbackisandwhyitsimportant.
What Is A Pullback?

Apullbackoccurswhenasecuritywhosepricehasbeenmovinghighersellsoff,i.e.thepriceofthe
securitydrops.Mostpeopletradepullbacksbasedondailybars,althoughsometradersseekout
intradaypullbackswhileothersuselongertimeframes.Thecommonthemeisthattradersare
attemptingtoidentifystocksthattheyfeelhavepulledbacktoofarandwilllikelyregaintheirupward
trend.Thismovementbacktowardthelongertermtrendisknownasmeanreversion.
Therearenumerouswaystoidentifypullbacks,rangingfromsimplyeyeballingachartallthewayup
tousingindicatorssuchasFibonaccinumbers.Althoughthesetechniquesworkforsometraders,we
preferamoreprecise,quantifiedapproach.Withexactentryandexitrulesinplace,wewanttosee
robusttestresultsforthemajorityofthemanycombinationsofparametersthatweretesting,andfor
thoseresultstobeconsistentacrosstheentiretestingperiod(2001throughearly2014).Suchsolid
resultsindicatethatwearenotsimplycurvefittingorcherrypicking.
Whentradingshorttermpullbacks,thebestresultsoccurwhenyouholdthepositionforatleastafew
days.Oftenstockspullbacksharplyandsnapbackstrongly.Thereisnowayofknowingaheadoftime
howfarthatupwardmovewillbe,soitiscrucialtohavewelldefinedexitrulesinplacewhichallowfor
therallytoplayout.
NowletsmoveontotheConnorsRSIPullbackStrategyrules.Aswithallofourstrategies,inthis
guidebookwewillpresentyouwithquantifiedrulesforenteringandexitingtrades.Inaddition,wewill
showyouhowdifferentvariationsoftheruleshaveperformedovertime,sothatyoucanselectthe
variationsthatbestcomplementyourowntradingplan.

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HerearetheentryrulesfortheConnorsRSIPullbackStrategy:
1. Thestockpricemustbeabove$5pershare.
2. Thestocksaveragedailyvolumeoverthepast21days(onetradingmonth)mustbeatleast
250,000sharesperday.
3. Thestocks10dayAverageDirectionalIndex(ADX)isabove30.
4. TodaythestockslowestpriceisatleastW%(W=2,4,6,or8)belowthepreviousdays
close.
5. TodayscloseisinthebottomX%(X=10or25)ofthedaysrange.
6. TheConnorsRSI(3,2,100)valueofthestockisbelowY,whereY=5,10,or15.
7. Iftheaboverulesaremettoday,buythestocktomorrowonafurtherintradaylimitZ%
belowtodaysclosingprice(Z=4,6,8,10).
8. ExitthepositionwhenthestockcloseswithaConnorsRSI(3,2,100)valueaboveN(N=50,60
70or80),exitingattheclosingprice.
Letslookateachruleinalittlemoredepth,andexplainwhyitsincludedinthestrategy.
Rule1helpsussteerclearofpennystocksandotherhighlyvolatile,unpredictablecompanies.Though
priceisneveraguarantee,wehavefoundthat$5/shareisagoodpricefloorforselectingmorestable
stocks.
Rule2assuresthatwereinhighlyliquidstockswhichcanbereadilyboughtandsold,withtightbid/ask
spreads.
Rule3confirmsthestrengthoftherecenttrend.ADXisnondirectional,soitwillquantifyatrend's
strengthregardlessofwhetheritisupordown.However,thenextthreeruleswillestablishthefact
thatthestockiscurrentlyinadowntrend.
Rule4identifiesabasicpullback:asignificantselloff,measuredasapercentageofthepreviousclosing
price.Sincethisruleusesthelowpriceforthedayratherthantheclosingprice,wedontyetknow
whattodaysoverallpriceactionlookslike,butwedoknowthatthestockfalteredinameaningfulway.
Rule5givesusmorevisibilityintotodayspriceaction.Closingrangeiscalculatedas:
ClosingRange=(CloseLow)/(HighLow)
Forexample,iftodaysLowpricewas$12.00,theHighpricewas$12.50,andtheClosingpricewas
$12.05,thentheclosingrangewouldbe:
ClosingRange=(12.0512.00)/(12.5012.00)=.05/.50=.10=10%
WhileRule4tellsusthatthestockstumbled,Rule5letsusknowthatitdidnotrecoversignificantly
beforetheendofthetradingday,whichinturnisagoodindicatorthatthepriceislikelytofallfurther
tomorrow.
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Rule6isthekeytodeterminingthequalityofthepullback.Ourresearchhasshownthatthelowerthe
ConnorsRSIvalueis,thelargerthebounceislikelytobewhenthestockrecovers.
Rule7allowsustoenterthetradeatanoptimalprice.Weretakinganalreadyoversoldstockas
measuredbyConnorsRSI(3,2,100),andthenwaitingforittobecomeevenmoreoversoldonanintraday
basis.Becausetheintradaypricedropisoccurringforasecondconsecutiveday,itsoftenaccompanied
byagreatdealoffear.Moneymanagersgetespeciallynervousandoftentelltheirheadtraderstojust
getmeoutaftertheyhavemadethedecisiontosell.Thispanichelpscreatetheopportunity.
Rule8providesawelldefinedexitmethod.Fewstrategieshavequantified,structured,anddisciplined
exitrules.Rule8givesyoutheexactparameterstoexitthetrade,backedbyoveradecadeofhistorical
testresults.
Letsseehowatypicaltradelooksonachart.Forthisexample,welluseavalueof4%fortheselloff
(W),25%fortheclosingrange(X),AConnorsRSI(Y)valueof10,andanentrylimit(Z)of8%.Wewillexit
whenConnorsRSIclosesabove70.
ChartcreatedinAmibroker.ReprintedcourtesyofAmiBroker.com.
Figure1:Setup,EntryandExitsignalsforMTL
Onthechartabove,thetoppaneshowsthepricebarsinblack,theverticalgraylinemarksthecurrently
selecteddaywhichisalsothesetupday,thegreenuparrowindicatestheentryday,andthereddown
arrowindicatestheexitday.Themiddlepanedisplaysthevolumeasverticalblackhistogrambars,and
showsthe21daymovingaverageofvolumeasagreenline.ThebottompaneshowsConnorsRSIasa
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redline,andADXasablueline.Nowwellconfirmthateachofourentryandexitconditionswas
correctlymet.
Rule1requiresthepriceofthestocktobeabove$5pershare.Forthedaysshownonthechart,wecan
seethatthepricehasrangedfromjustover$7.50/sharetojustunder$5.50/share,thusmeetingour
condition.
Rule2requiresthatthe21daymovingaverageofthevolumebegreaterthan250,000shares/day.The
averagevolumehasbeenbetween2and4millionshareslately,andonthesetupdayitwas2.9million,
sowevefarexceededthisrequirement.
Rule3statesthatADX(10)mustbeabove30.OnthesetupdaytheADX(10)valueis48.62.
Withourselectedinputparameters,Rule4tellsustolookforalowpricethatsatleast4%below
yesterdaysclose.On5/16/2012(thedaybeforethesetup),MTLclosedat$6.42.Therefore,todays
lowmustbebelow
$6.42x(100%4%)=$6.42x0.96=$6.16
Theactuallowpriceonthesetupdaywas$5.90,sowehavemetthecriteriaforthisrule.
Rule5requiresthattheclosingpricebeinthebottomX%ofthedaysrange.Weselected25%forthis
exercise,soourcalculationgoesasfollows:
ClosingRange=(CloseLow)/(HighLow)<25%
($5.91$5.90)/($6.45$5.90)<0.25
$0.01/$0.55<0.25
0.018<0.25TRUE
Inthiscase,wecouldhavesimplylookedatthechartandeasilyseenthattheclosingpricewas
extremelyclosetothedayslow,andthereforealmostcertainlyinthebottom25%ofthedaysrange.
Inothercases,thechartmaynotmakethissoobvious,andyoullhavetodothemath
Basedonourstrategyparameters,Rule6requirestheConnorsRSI(3,2,100)valuetobebelow10,which
itis(thevalueshownonthechartis2.91).
Rule7tellsusthatnowthatoursetupconditionshavebeenmet,weshouldsetalimitordertoenteron
thenexttradingday.Ourstrategyparametersspecifythatwewilluse8%forthislimitorder.That
meansthatourlimitpricewillbesetat:
$5.91x(100%8%)=$5.91x0.92=$5.44
Theactuallowpriceon5/18/2012was$5.42,whichmeetsourcriteriawithtwocentstospare.We
wouldenterthistradewhenourbuyordergetsfilledatthelimitpriceof$5.44.
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Rule8specifiesthatwewillexitthetradewhenConnorsRSI(3,2,100)closesabove70.Forthistrade,
thatoccursontheverynexttradingday,whichisonMonday,5/21/2012.Weexitatorneartheclosing
priceof$6.07,givingusaprofitofover11.6%,excludingcommissions.
Asyoureviewtheexplanationabove,noticethatRules1through5weretrueformostorallofthedays
leadinguptothesetupday.Price,volume,andADXwereallatacceptablelevels.Therewereacouple
ofdecentselloffdays,aswellasclosingpricesinthebottom25%ofthedaysrange.However,
5/17/2012isthefirstdaythatalloftheseconditionsweremetandConnorsRSIdroppedbelow10.
Thatswhythisindicatoristhecenterpieceoftheentirestrategy.
Letsquicklygothroughonemoreexample.Sincewellbefocusingonexitsinalatersection,well
continuetouseanexitofConnorsRSI(3,2,100)>70.However,wellchangetheotherstrategy
parametersasfollows:
Selloff(W)=2%
ClosingRange(X)=10%
ConnorsRSI(3,2,100)=5
EntryLimit(Z)=6%
Hereisthechart,whichusesthesameconventionsasFigure1:
ChartcreatedinAmibroker.ReprintedcourtesyofAmiBroker.com.
Figure2:TradesignalsforWHX
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Theclosingpriceof$9.97fulfillstheRule1requirementof$5/shareorgreater.
The2dayaveragevolumeof286,704meetstheRule2criteriaof250,000.
TheADX(10)valueis51.60,farabovetheRule3requirementof30.
Wecanseethaton7/17/2012(thedaypriortothesetupdayshownbythegrayverticalline)theprice
ofWHXclosedabitabove$15,whilethelowon5/18/2012wasbelow$10.Alittlementalarithmetic
tellsusthattheselloffwasover30%,sotheresreallynoneedtodotheexactmathtoverifythatweve
exceededthe2%sellofftarget,thusmeetingtheRule4requirement.
Likewise,itsobviousfromthechartthattheclosingpriceon7/18/2012wasinthebottom10%ofthe
daysrange,satisfyingRule5.
ThechartshowsusthattheConnorsRSI(3,2,100)valuewas2.55onthesetupday,whichmeansthatthe
criteriaforRule6hasbeenmet.
Rule7tellsustoenteralimitorder6%belowthesetupdaysclosingpriceof$9.97.Thatmeansour
limitpricefor7/19/2012willbe:
$9.97x(100%6%)=$9.97x0.94=$9.37
Theactualpriceon7/19/2012fallsallthewayto$8.20,butwewillenterthetradeatthelimitprice
whichwedeterminedinadvance:$9.37.
Finally,asperRule8,weexitthetradewhenConnorsRSI(3,2,100)closesabove70.Thisoccurstwo
tradingdayslater,onMonday,7/23/2012.
Inthenextsectionwelltakeacloserlookatexitmethods,andthenwelldiveintothetestresultsso
thatyoucandeterminewhichstrategyvariation(s)arethebestfitforyourowntrading.
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Section4
TheRoleofExits

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Uptothispoint,wehavebeenfocusedmainlyontheentryrulesfortheConnorsRSIPullbackStrategy.
Butentriesareonlyhalfthestory.Youdontmake(orlose)moneyuntilyouexitthetrade,sohavinga
precise,quantifiedexitmethodiscrucialtogeneratingpredictablereturns.Unfortunately,many
publishedstrategieseitherglossovertheexitrulescompletely,ortheyrelyonvaguedirectivessuchas
exitwhenyoureachyourprofittarget.Sincetheydontspecifyhowtocalculateareasonableprofit
target,thisisbasicallyequivalenttosayingexitwhenyoufeellikeyouvemadeenoughmoney,which
isnotveryhelpfulatall.
Letstalkconceptuallyaboutentriesandexitsforamoment.Bothentryandexitrulescanbethoughtof
intermsofhowstricttheyare,i.e.howeasyordifficulttheyaretoachieve.Youmightalsosaythat
strictnessisameasureofhowfrequentlyorinfrequentlytheruleconditionsoccur.Foroscillatorssuch
asConnorsRSI,valuesthatareclosertotheextremes(0and100)aremorestrict(lesslikelytooccur)
thanvaluesthatareinthemiddleoftherange.
Stricterentryruleswillbesatisfiedlessfrequentlythanmoreleniententryrules,andthusastrategy
thatreliesonthestricterruleswillgenerallygeneratefewertradesthanastrategywhoseentryrulesare
moreeasilysatisfied.Witharobuststrategy,therewardforfewertradesisgenerallyahighergainper
trade,onaverage.Wellquantifythisinthenextsectionwhenwelookattestresults.Fornow,allowus
tosimplystatethatifyoubuyaslightlyoversoldstock,itsmostlikelytohaveamoderaterebound.But
ifyouwaitforastockthatsextremelyoversold,thechancesaremuchhigherthatitwillhavea
significantbounceandcreateabiggerprofit.
Thestrictnessofexitruleshaslittleeffectonthenumberoftradesgeneratedbythestrategy.However,
justliketheentryrules,stricterexitrulestypicallyresultinhigheraverageprofits.Why?Because
stricterexitrulestendtokeepyouinyourtradesforalongertime,givingthestockmoretimeto
experiencethemeanreversionbehaviorthatwereattemptingtoexploitwithastrategylikethe
ConnorsRSIPullbackStrategy.Thus,forentriesthetradeoffisbetweenmoretradesandhighergains
pertrade,whileforexitsthetradeoffisbetweenshortertradedurationsandhighergainspertrade.
Forthisstrategy,wevedecidedtokeeptheexitmethodsverysimple.ItturnsoutthatConnorsRSIis
notjustagreatentryindicator;itsalsoaveryreliablemethodformeasuringthedegreetowhichweve
capturedthemeanrevertingpricebounce.Therefore,ourexitmethodssimplywaitfor
ConnorRSI(3,2,100)toreachapredeterminedlevel.Wevefoundthatvaluesinthe50to80rangeare
themosteffectiveexitindicators,andwewillpresenttestresultsforConnorsRSI=50,60,70and80.
Withthesedifferentexitmethodsinmind,wecanrevisitapreviousexampletoseethetrade
duration/profittradeoffinaction.HeresthechartforWHXthatwedissectedpreviously:
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ChartcreatedinAmibroker.ReprintedcourtesyofAmiBroker.com.
Figure3:TheEffectofExits
Noticethatonthedayfollowingthetradeentry,theConnorsRSI(3,2,100)valuerosetoaround68.If
ourexitcriteriahadbeenaConnorsRSIvalueof65,thenwewouldhaveexitedthetradeafteroneday,
atapricearoundthatdayscloseof$9.39.
Ouractualexitoccurredtwodaysafterenteringthetrade.TheConnorsRSI(3,2,100)valueonthisday
was75.48,soifourcriteriahadbeenavalueof70or75,wewouldhaveexitedonthisdaynearthe
closingpriceof$10.37.Wewouldhaveachievedahigherprofit,butourtradedurationwouldhave
beendoublewhatitwaswiththemorelenientexit.
Threedaysaftertheentry,ConnorsRSI(3,2,100)closedat79.16,andthepriceclosedat$10.82.Thus,if
ourexitcriteriahadbeenbetween76and79,wewouldhavestayedinthisparticulartradeforatotalof
threedays,butwouldhaveachievedthemaximumpotentialprofit.
Finally,itsworthnotingthatConnorsRSI(3,2,100)neverwentabove80beforethepricestartedto
declineagain.Inotherwords,ifwemakeourexitcriteriatoostrict,theresadangerthatwewontexit
thetradebeforetheprofitsstarttoevaporate.OurresearchhasshownthatusingaConnorsRSIvalue
of85orhigherasanexitindicatoristoorestrictivetobeeffective,andwilltypicallycauseyouroverall
resultstosuffer.
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Section5
TestResults

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Wecanneverknowforsurehowatradingstrategywillperforminthefuture.However,forafully
quantifiedstrategysuchastheConnorsRSIPullbackStrategydescribedinthisGuidebook,wecanat
leastevaluatehowthestrategyhasperformedinthepast.Thisprocessisknownasbacktesting.
Toexecuteabacktest,wefirstselectagroupofsecurities(sometimescalledawatchlist)thatwewant
totestthestrategyon.Inourcase,thewatchlistiscomprisedofstockstradedonU.S.exchanges.No
ETFs,options,futuresorotherderivativeproductsareincluded.Nextwechooseatimeframeover
whichtotest.Thelongerthetimeframe,themoresignificantandinformativethebacktestingresults
willbe.ThebacktestsfortheConnorsRSIPullbackStrategystartinJanuary2001andgothrough
February2014,thelatestdateforwhichwehavedataasofthiswriting.Finally,weapplyourentryand
exitrulestoeachstockfortheentiretestperiod,recordingdataforeachtradethatwouldhavebeen
entered,andaggregatingalltradedataacrossaspecificstrategyvariation.
OneofthekeystatisticsthatwecangleanfromthebacktestresultsistheAverage%Profit/Loss,also
knownastheAverageGainperTrade.Sometradersrefertothisastheedge.TheAverage%P/Lis
thesumofallthegains(expressedasapercentage)andallthelosses(alsoasapercentage)dividedby
thetotalnumberoftrades.Considerthefollowingtentrades:
TradeNo. %GainorLoss
1 1.7%
2 2.1%
3 4.0%
4 0.6%
5 1.2%
6 3.8%
7 1.9%
8 0.4%
9 3.7%
10 2.6%

TheAverage%P/Lwouldbecalculatedas:
Average%P/L=(1.7%+2.1%4.0%+0.6%1.2%+3.8%+1.9%0.4%+3.7%+2.6%)/10
Average%P/L=1.08%
Forshorttermtradeslastingthreetotentradingdays,mosttraderslookforanAverage%P/Lof0.5%
to2.5%acrossalltrades.Allotherthingsbeingequal,thelargertheAverage%P/L,themoreyour
accountwillgrowovertime.Ofcourse,allotherthingsareneverequal!Inparticular,itsimportantto
considertheNumberofTradesmetricincombinationwithAverage%P/L.Assumingthatyouuse
approximatelythesameamountofcapitalforeachtradethatyouenter,youllmakealotmoremoney
ontentradeswithanaverageprofitof10%pertradethanyouwillononetradethatmakes20%.
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AnotherimportantstatisticistheWinningPercentage.Thisissimplythenumberofprofitabletrades
dividedbythetotalnumberoftrades.Inthetableabove,7ofthe10tradeswereprofitable,i.e.had
positivereturns.Forthisexample,theWinningPercentageis7/10=70%.
WhydowecareaboutWinningPercentage,aslongaswehaveasufficientlyhighAverage%P/L?
BecausehigherWinningPercentagesgenerallyleadtolessvolatileportfoliogrowth.Losingtradeshave
awayofclumpingup,andwhentheydothat,thevalueofyourportfoliodecreases.Thisisknownas
drawdown.Thosedecreases,inturn,canmakeyoulosesleeporevenconsiderabandoningyourtrading
altogether.Iftherearefewerlosers,i.e.ahigherWinningPercentage,thenlossesarelesslikelyto
clump,andyourportfoliovalueismorelikelytogrowsmoothlyupwardratherthanexperiencingviolent
upanddownswings.
LetsturnourattentiontothetestresultsforthedifferentvariationsoftheConnorsRSIPullback
strategy.First,welllookatthe20variationsthatproducedthehighestAverage%P/L.
Top20VariationsBasedonAvg%P/L
#
Trades
Avg
%P/L
Avg
Days
Held Win%
Sell
Off%
Closing
Range
Entry
ConnorsRSI
Entry
Limit ExitMethod
479 14.79 7.13 78.29 8 10 5 10 CRSI>80
596 13.71 7.10 77.85 6 10 5 10 CRSI>80
886 13.69 7.55 77.09 8 10 10 10 CRSI>80
480 13.67 3.23 79.58 8 10 5 10 CRSI>70
480 13.45 2.16 80.00 8 10 5 10 CRSI>60
747 13.32 7.42 76.04 8 25 5 10 CRSI>80
663 13.26 7.14 77.68 4 10 5 10 CRSI>80
676 13.20 7.16 77.81 2 10 5 10 CRSI>80
480 13.14 1.84 80.00 8 10 5 10 CRSI>50
750 12.84 3.22 79.47 8 25 5 10 CRSI>70
597 12.82 3.21 78.89 6 10 5 10 CRSI>70
751 12.61 2.15 78.96 8 25 5 10 CRSI>60
665 12.51 3.11 79.25 4 10 5 10 CRSI>70
597 12.47 2.17 79.06 6 10 5 10 CRSI>60
678 12.42 3.13 79.20 2 10 5 10 CRSI>70
1104 12.41 7.51 76.09 6 10 10 10 CRSI>80
1438 12.40 7.88 75.87 8 25 10 10 CRSI>80
751 12.37 1.80 78.96 8 25 5 10 CRSI>50
920 12.33 7.39 75.98 6 25 5 10 CRSI>80
597 12.31 1.83 79.56 6 10 5 10 CRSI>50

Hereisanexplanationofeachcolumn.
#TradesisthenumberoftimesthisvariationtriggeredfromJanuary1,2001February28,2014.
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Average%P/Listheaverageprofitorlossforalltrades,includingthelosingtrades,expressedasa
percentage.Thetop20variationshaveallshownpositivegainsrangingfromover12%tonearly15%.
AverageDaysHeldisthenumberofdaysonaveragethetradewasheld.Inallcasesitslessthaneight
days,andinseveralcasesaroundtwodays.
Win%isthepercentageofsignalswhichclosedoutataprofit.Thetop20variationshaveallbeeninthe
75%80%range,anextremelyhighlevelinaworldwheremostsuccessfultradershopetobecorrect
55%60%ofthetime.
SellOff%correspondstoRule4ofthestrategy.Itistheminimumrequireddropinpriceonthesetup
day,expressedasapercentage.
ClosingRangeisspecifiedbyRule5ofthestrategy.Itisthemaximumalloweddifferencebetweenthe
closingpriceandthelowpriceoftheday,expressedasapercentageofthetotaldailyrange(high
low).
EntryConnorsRSIisthemaximumallowedConnorsRSI(3,2,100)valueonthesetupday.Thisvalue
correspondstoRule6ofthestrategy.NoticethepreponderanceoftheConnorsRSIthresholdof5.This
highlightsthefactthatthemoreoversoldthestockis,thehigheritwilltypicallyrebound.
EntryLimitistheintradaypullbackusedtotriggeranentry.Thismeansthatthebuytriggeroccursthe
nextdayZ%belowtheclosingpriceonthesignalday,asdescribedinRule7ofthestrategy.Thereforeif
todaygeneratesasetup,thesignalisexecutedonlyifthestockpullsbackfurthertomorrow.Inour
testingwelookedat4%10%limits.Asyoucansee,10%dominatesthelistabove,furtherreinforcing
thefactthatthelargertheintradaypullback,thegreatertheedges.
ExitMethodisthemethodusedtodeterminewhentoexitthetrade.Manyofthetop20variationsas
measuredbyAverage%P/LusedanexitmethodofConnorsRSI(3,2,100)>80,meaningthatweexitthe
tradeonthefirsttradingdaywheretheConnorsRSI(3,2,100)valueisgreaterthan80attheclose.Thisis
whatweexpectbasedonourpreviousdiscussionofhowstricterexitcriteriagenerallyleadtohigher
gainsbutalsolongertradedurations.
Whatweseeaboveare20differentvariationsoftheConnorsRSIPullbackstrategywhichshow
consistentbehaviorovermorethanthirteenyears.Thekeyistochoosethevariationorvariationsthat
bestcomplementyouroveralltradingplanandthenapplytheminasystematic,structuredmanner.
Nowletsnowlookatthe20highestperformingvariationsasmeasuredbypercentagecorrect.

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Top20VariationsBasedonWin%
#
Trades
Avg
%P/L
Avg
Days
Held Win%
Sell
Off%
Closing
Range
Entry
ConnorsRSI
Entry
Limit ExitMethod
480 13.45 2.16 80.00 8 10 5 10 CRSI>60
480 13.14 1.84 80.00 8 10 5 10 CRSI>50
1057 11.66 3.08 79.66 2 25 5 10 CRSI>70
1031 11.75 3.08 79.63 4 25 5 10 CRSI>70
480 13.67 3.23 79.58 8 10 5 10 CRSI>70
597 12.31 1.83 79.56 6 10 5 10 CRSI>50
750 12.84 3.22 79.47 8 25 5 10 CRSI>70
924 12.20 3.15 79.44 6 25 5 10 CRSI>70
678 11.92 1.81 79.35 2 10 5 10 CRSI>50
665 12.51 3.11 79.25 4 10 5 10 CRSI>70
665 11.99 1.81 79.25 4 10 5 10 CRSI>50
925 11.79 1.77 79.24 6 25 5 10 CRSI>50
678 12.42 3.13 79.20 2 10 5 10 CRSI>70
1058 11.27 1.76 79.11 2 25 5 10 CRSI>50
1032 11.37 1.76 79.07 4 25 5 10 CRSI>50
597 12.47 2.17 79.06 6 10 5 10 CRSI>60
751 12.61 2.15 78.96 8 25 5 10 CRSI>60
751 12.37 1.80 78.96 8 25 5 10 CRSI>50
925 11.92 2.13 78.92 6 25 5 10 CRSI>60
597 12.82 3.21 78.89 6 10 5 10 CRSI>70

Whenlookingatthevariationswhichhavebeencorrectthemostoften,weseeabroaderarrayof
strategyparameters.However,theWinRatesareallverycloseto80%forthetimeperiodfrom2001
throughFebruary2014.Suchconsistentresultsfromavarietyofstrategyvariationsoveralongperiod
oftimeconfirmtherobustnatureoftheConnorsRSIPullbackstrategy.
Forsometraders,themostimportantmetricsforevaluatingastrategymayrevolvearoundcapital
management.Forthesetraders,itsacceptabletogiveupaportionofthegainsiftheycangettheir
moneybackmorequicklysothatitcanbedeployedelsewhere.So,letstakealookatthestrategy
variationsthathavetheshortesttradedurationsasmeasuredbyAverageDaysHeld.

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Top20VariationsBasedonAverageDaysHeld
#
Trades
Avg
%P/L
Avg
Days
Held Win%
Sell
Off%
Closing
Range
Entry
ConnorsRSI
Entry
Limit ExitMethod
1032 11.37 1.76 79.07 4 25 5 10 CRSI>50
1058 11.27 1.76 79.11 2 25 5 10 CRSI>50
925 11.79 1.77 79.24 6 25 5 10 CRSI>50
751 12.37 1.80 78.96 8 25 5 10 CRSI>50
1522 8.89 1.80 75.76 2 25 5 8 CRSI>50
665 11.99 1.81 79.25 4 10 5 10 CRSI>50
678 11.92 1.81 79.35 2 10 5 10 CRSI>50
1475 8.98 1.81 75.53 4 25 5 8 CRSI>50
597 12.31 1.83 79.56 6 10 5 10 CRSI>50
1000 9.52 1.83 76.50 2 10 5 8 CRSI>50
1303 9.37 1.83 75.29 6 25 5 8 CRSI>50
2167 6.82 1.83 73.28 4 25 5 6 CRSI>50
2261 6.67 1.83 73.64 2 25 5 6 CRSI>50
480 13.14 1.84 80.00 8 10 5 10 CRSI>50
975 9.63 1.84 76.41 4 10 5 8 CRSI>50
1831 7.44 1.84 72.75 6 25 5 6 CRSI>50
1416 7.27 1.85 74.01 4 10 5 6 CRSI>50
1477 7.07 1.85 74.14 2 10 5 6 CRSI>50
1043 9.94 1.86 75.26 8 25 5 8 CRSI>50
861 9.86 1.87 75.96 6 10 5 8 CRSI>50

Asyoumightexpectfromourearlierdiscussion,thestrategyvariationswiththeshortesttrade
durationsaredominatedbythemostlenientexitthatwetested,whichisanexitwhen
ConnorsRSI(3,2,100)isgreaterthan50.All20ofthesevariationshaveaveragedurationsoflessthan
twodays.Whatyoumightnothaveexpectedistostillseeaveragegainspertradeof6.7%13%!

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Section6
TradingOptionsUsing
theConnorsRSI
PullbackStrategy

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PleasenotethattheoptionssectioninthemajorityoftheConnorsResearchTradingStrategySeriesis
thesamebecausethestrategysetupsofteninvolvelargemovesinbriefperiodsoftime.Inouropinion,
andconfirmedfromfriendswhoareprofessionaloptionstraders(onewithoverthreedecadesof
experience);thereisonebestwaytotrademoveslikethese.
Optionstradinghasbeenamajorgrowthindustryoverthepast5yearsinthemarkets.Thisisbecause
spreadshavetightened,liquidityhasincreased,andtheabilitytoeasilytradecomplexoptionshasnever
beensimpler.
Wellnowfocusonapplyingoptionstradingtotheshorttermmarketmoveswehavejustlearned.Like
everythingelseinthisGuidebook,therearedefinitiverulesastohowtoexecuteanoptionstradewhen
astrategysignaltriggers.
Hereiswhatweknowbaseduponthedata:
1.Themajorityofthemovesfromentrytoexithavebeenheldaveryshortperiodoftime(27
tradingdays).
2.Theaveragegainspertradehavebeenlargewellbeyondthenormaldistributionofprices
overthatshortperiodoftime.
3.Ahighpercentageofthemoveshavebeencorrect.
Whenwelookatthistypeofbehavior,itcanleadtomanystrategiesbutonestrategystandsout(and
thishasbeenconfirmedbyprofessionaltraders).Thestrategyistobuyfrontmonth,inthemoneylong
calls.
Whyfrontmonthinthemoneylongcalls?Becausetheywillmovetheclosesttothestockitself.And
thecloseranoptionmoveswiththestock,thegreaterthegainwillbeonapercentagebasiswhenthe
moveiscorrect.
Herearetherules.
1.Asignaltriggers.
2.Buythefrontmonthinthemoneycall.Ifyouweretonormallybuy500sharesofstock,buy5
calls(every100sharesshouldequalonecall).
3.Exittheoptionswhenthesignaltriggersanexitonthestock.
Letsgofurther:
1.Whatdoesinthemoneyexactlymeanhere?
Inthiscaseitsdefinedasoneortwostrikepricesinthemoney.Ifthestockisat48andstrikesare$5
apart,thenbuythe40or45calls.
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2.Whatdoesfrontmonthmean?
Becausetheholdingperiodissoshort,youwanttotradetheoptionswhosemonthlyexpirationisthe
closest.Iftheclosestmonthis7tradingdaysorlessfromthefrontmonthsoptionexpirationdate
(meaningthesecondThursdaybeforeorcloser)usethefollowingmonthastheonetotrade.
3.WhathappensifIminthepositionanditexpiresyetthesignalforthestockisstillvalid?
Inthiscase,rolltothenextmonth.Youretradingthestocksignalssoyouwanttohaveexposuretothat
signal.
4.Whataboutliquidityandspreads?
Theressomediscretionhere.Thereisnohardandfastruleastowhatexactlyliquiditymeansin
options.Forexample,comparetheliquidityofyourstocktoSPY,whichisextremelyliquidcomparedto
abluechipstock.Bothcanbeconsideredliquid,butthebluechipsoptionwillbelessliquidthanSPY.
Assumingthereisactivevolumeintheoptions,lookatthespreads.Iftheoptionistrading3.00bid
3.30offer,thespreadis10%.Canyoureallyovercomea10%spread?Notlikely.Nowcomparethisto
anoptionthatstradingat3.25bid3.30offer.Thisisfarmoreacceptableandtradable.
5.Whataretheadvantagesofbuyingcalloptionsinsteadofthestock?
Assumingthespreadsandliquidityarethere,theadvantagesarelarge:
1.GreaterpotentialROIoncapitalinvested.
2.Lessmoneytiedup.
3.Lesspointsatrisk.Thismeansifastocksignalsat50,itcanloseupto50points.Theoptions
canonlyloseuptothepremiumyoupaid.So,ifyouboughtthe45calls,theriskisonlythe
premium.
4.Theresgreaterflexibility.Forexample,letssaythestocktriggeredabuysignalat50and
youpaid5.50forthe45calls.Ifthestockimmediatelymoveshigher(letssayto56);you
havechoiceshere.Youcanexit,oryoucanrollintothe50callsgettingmostofyourmoney
outandnowturningthisintoanearlyfreetradeifyoubelievethatpriceswillcontinueto
run.
Therearenumerousexampleslikethisandyoucanfindthesetypesofstrategyopportunitiesinmost
optionsbooks.Buttradinganythingexoticordifferentthansimplybuyingthecallsisagainsttheadvice
ofthemanyprofessionalsweposedthisquestionto.
Inconclusion,optionsprovidetraderswithagoodalternativetobuyingthestockoutright.The
structuredmethodologyforourstrategiesis:frontmonth,inthemoney,withequivalentsizing(1
optionper100shares),andexitingwhenthesignalexits.
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Theaboveoptionsstrategy,inmanyexpertsopinion,isthebestandmostefficientstrategybasedupon
thehistoricaldatafromthesesignals.
IfyouwouldliketogofurtherwithOptionswerecommendourOptionsTradingwithConnorsRSI
strategyguidebook.Youcanpurchaseitdirectlyfromourwebsite:
http://store.tradingmarkets.com/ebooks/options/connorsresearchtradingstrategyseriesoptions
tradingwithconnorsrsi.html.

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Section7
AdditionalThoughts

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1.AsyouhaveseenthroughoutthisGuidebook,theConnorsRSIPullbackstrategyhashadlarge
quantifiededgeswhenappliedinasystematicmanner.
2.Thereareliterallyhundredsofpotentialvariationsforyoutouse.Byadjustingtheinputvariables
describedintherules,youcancustomizehowtheConnorsRSIPullbackstrategywillperformforyou.
Wantmoretrades?LookatvariationswithasmallerSellOff%orEntryLimitorahigherConnorsRSI
entrythreshold.Biggeraveragereturns?Checkoutthevariationsthathavethestrictestentrycriteria
(highSellOff%andEntryLimit%and/orlowentryvalueforConnorsRSI)andlongestdurations
(ConnorsRSI80exitmethod).Wanttogetinandoutoftradesmorequicklytoreduceovernightriskand
freeupyourcapitalforothertrades?TrythevariationsthatutilizetheConnorsRSI50exitmethod.
Onceyouunderstandhowthestrategyvariablesaffecttheresults,youcanidentifythevariationor
variationsthatbestfityourtradingstyle.
3.Whataboutstops(andweincludetheanswertothisinallourStrategyGuidebooks)?
WehavepublishedresearchonstopsinotherpublicationsincludinginourbookShortTermTrading
StrategiesThatWork.
Whatwehavefoundisthatstopstendtolessenperformanceandinmanycasestheycompletely
removeedges.Yes,itfeelsgoodwhenastockkeepsmovinglowerandlowerandastopgotyouout.On
theotherside,theresearchwhichisbackedbyuptotwodecadesoftestresultsonmanyshortterm
tradingstrategiessuggeststhatstopsgethitoftenandaccumulatemany,manylosses.Fewtrading
strategiescanovercometheseaggregatedlosses.
Formanytradersstopsareamust.Psychologicallyitallowsthemtotaketrades,especiallydifficult
trades.Whetheryouusethemornotisapersonalchoice.Onthewholethough,theedgesyouseein
thisstrategyandmanyothershorttermstrategiesarelowerwhenstopsareappliedtothem.Againthis
isapersonalchoiceonlyyoucanmakeforyourself.Weknowsuccessfultradersinbothcamps.
4.Slippageandcommissionwerenotusedinthetesting.Factorthemintoyourtrading(theentriesare
atlimitpricessoslippageisnotanissue)andmakesureyouaretradingatthelowestpossiblecosts.
Mostfirmsarenowallowingtraderstotradeforunder1centashare,soshopyourbusiness,especially
ifyouareanactivetrader.Theonlinebrokeragefirmswantyourbusiness.
5.AsyouhaveseenherewiththeConnorsRSIPullbacksstrategy,therearelargeedgesinstockswhich
selloffandthensellofffurtherintraday.Thesetradesareoftenaccompaniedbyfearanduncertainty
andthisiswhenlargeedgesappear.Seekoutthesetradesbecause,asyouhaveseen,theyvebeen
lucrativeformanyyears.


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WehopeyouenjoyedthisSecondEditionofanIntroductiontoConnorsRSI.Ifyouhaveanyquestions
aboutConnorsRSIorthestrategiesinthisguidebookpleasefeelfreetoemailusat
info@connorsresearch.com.
IfyouareinterestedinadditionalConnorsRSItradingstrategies,weofferavarietyofConnorsRSI
TradingStrategyGuidebooksthatyoucanlearnmoreaboutonoursite.
WealsoofferConnorsRSIaddonmodulecodeforAmiBroker,MetaStock,thinkorswimand
TradeStation.Youcanrequestlinkstodownloadthatcodehere.
Finally,ConnorsRSIreadingsarefreelyavailableforover3,500popularstocksandETFsonour
TradingMarketsAnalyticswebsiteat:http://analytics.tradingmarkets.com/Screener/.

P a g e |37

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AbouttheAuthor
LaurenceA.Connors,CEOandFounder
Mr.ConnorsservesasChairman,CEO/CoFounderofTheConnorsGroupwhichpublishesand
distributesfinancialmarketinformationandtechnology.
LarryConnorsisalsothePrincipalManagingPartnerofConnorsGlobalAssetManagementLLC
(www.connorsglobal.com).
HeisalsoaManagingPartnerofConnorsResearch,LLC,ahighlyrespectedfinancialmarketsresearch
firm.
Mr.Connorsistheauthorofanumberoftopsellingbooksonmarketstrategiesandvolatilitytrading,
includingHowMarketsReallyWork,2ndEd.(BloombergPress)andStreetSmarts(M.Gordon
Publishing),whichwasselectedbyTechnicalAnalysisofStocksandCommoditiesasoneofThe
Classicsfortradingbooksofthe20thcentury.


P a g e |38

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LearntheLatestAdvancestoConnorsRSItoImproveYourETFTradingAccuracy
NEWfromConnorsResearch:
TheAdvancedConnorsRSITradingStrategyforETFs

ThereleaseoftheConnorsRSIquantifiedmomentumoscillatorhasgenerated
atremendousresponsefromactivetradersoverthepast18months.Infact,
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AswecontinuetoexplorenewresearchpossibilitiesforConnorsRSIwe
continuetodiscoverthatincorporatingthisindicatorintotradingsetupscan
oftendeliverextraordinaryresults.
Recently,ConnorsResearchdevelopedanewConnorsRSIETFtradingstrategythatoffers:
HighHistoricalAccuracy:overadozenstrategyvariationswithaWinRateabove90%;
StrongGains:15variationswithAvg.P/Lofgreaterthan9%;
Quickprofits:Avg.Holdisoftenlessthan2daysandlessthan3onalmostallvariations.
ThisstrategyseekstoidentifyhistoricallyhighprobabilityETFtradingsetupsandonlysignalsabuy
whenthereisbothahighprobabilityofsuccessandthepotentialforahigherthanaveragegain...with
manyvariationsdeliveringanaveragegainofmorethan4%perday.
ThisguidebookwillteachyouexactlyhowtoapplyourlatestresearchadvanceforConnorsRSItoETFs.
OrderTheAdvancedConnorsRSITradingStrategyforETFs
Ifyouarelookingtotradethemostconsistentquantifiedrulebasedstrategiesavailableto
traderstoday,orderTheAdvancedConnorsRSITradingStrategyforETFs.Orcalltollfree1
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strategyfor60days.Ifyouarenotfullysatisfiedwiththeresults,youwillreceiveafullrefundofthe
purchaseprice.

P a g e |39

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Here'sHowYouCanSwingTradeS&P500StocksforShortTermGains
Introducing:S&P500TradingwithConnorsRSI

ThisguidebookwillteachyouthehowtoswingtradeS&P500stocksto
captureshorttermgainsfrommispricedopportunitiesidentifiedby
ConnorsRSI.
Theonlyquantifiedmomentumoscillator,ConnorsRSIcombinesprice,
momentum,durationofthetrend,andrelativemagnitudeoftheprice
changeallinasingleindicator.
ConnorsRSIgivesyouaquantifiedwaytoidentifystocksmostlikelyto
reverse.Andasyouwillseefromthetestresults,especiallyona
percentagecorrectbasis,tradingS&P500stockswithConnorsRSIcanbeaneffectivewaytoachieve
growthwithinthecomfortzoneoftheS&P500.
WithS&P500TradingwithConnorsRSI,youwillreceiveover40variationswithspecificEntry/ExitRules
fordefinedbyConnorsRSI,includinglimitorders:
Morethanadozenvariationsshowwinningtraderatesover80%
18variationsshowanAvg.%P/Lofover10.0%
Mostholdsareforlessthan5days
Ifyourelyondata,notopinion,tomakeyourtradingdecisions,andyouwanttheabilitytochoosethe
bestvariationstotradeyourstrategies,thenthisguideisforyou.
ToorderyourcopyofS&P500TradingwithConnorsRSI,pleaseclickhereorcalltollfree1888484
8220ext.3(outsidetheUSpleasecall9734947311).Youwillreceiveyourdownloadlinkforyourcopy
immediatelyafterordering.

P a g e |40

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ConnorsRSICanChangeYourEntireApproachtoOptions
NewResearchShowsHowYouCanUseConnorsRSItoImproveYourAccuracy
Introducing:OptionsTradingwithConnorsRSI
Optionstradescanhaveareputationasriskyinvestmentsamongmanyretailtraders.Thatperception
maychangewhenyouexaminethisnewresearchonapplyingtheConnorsRSI
toSPYOptionsTrading.
Oftenwhenyouhearsomeonerefertooptionstrategies,theyretalkingabout
optionpositionswithmultiplestrikesand/ormultipleexpirationslikevertical
spreads,calendarspreads,butterflies,ironcondorsandahostofothers.
However,thesestrategiesjustdefineasetofrelatedoptioncontracts
withoutanyguidelinesforprofitablyenteringandexitingtrades.
Incontrast,ourdefinitionofstrategyisasetofquantifiedentryandexitruleswhichyoucanexecute
preciselytimeaftertime.Wesupporttheseruleswithhistoricaltestresultsthatallowyoutoselectthe
variationsofthestrategythatwillbestcomplementyourowntradingplan.
Thisnewapproachgreatlysimplifiestheentireprocessoftradingoptions.Italsoallowsyoutoselect
yourtradeswithamoredefinedlevelofprecision.
InOptionsTradingwithConnorsRSIyouwilllearnhowtoapplyasystematic,quantifiedapproachto
selectingwhichoptionstotradeaswellastothetimingofentriesandexits.Thesimulatedhistoricaltest
resultsindicatethefollowingbenefits:
HigherAccuracy:Upto74%WinningTradeRatesareshownonthemostaccuratevariations.
QuickProfits:Avg.Holdisonly4daysacrossallvariations
StrongGains:Eachofthetop20variationspresentedshowtestresultswithanAvg.P/Lofover
10%orgreater
OrderOptionsTradingwithConnorsRSI
Ifyouarelookingtotradethemostconsistentquantifiedrulebasedstrategiesavailabletotraders
today,orderOptionsTradingwithConnorsRSI.
ToorderyourcopyofOptionsTradingwithConnorsRSI,pleaseclickhereorcalltollfree18884848220
ext.3(outsidetheUSpleasecall9734947311).

P a g e |41

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InterestinTradingVolatility&EspeciallyVXXisExploding
QuantifiedHistoricalTestResultsShowPossibilitiesforImpressiveGainsfrom
TradingVolatilityasItsOwnAssetClass
Introducing:TheVXXTrendFollowingStrategy
Inthepast,Volatilitytradingwastraditionallyusedbyprofessionalsasamethodtohedgea
portfolio.Nowindividualsaretradingvolatilitydirectly.
Volatilitytodayisanewassetclasswithitsownuniquequalitiesthatset
itapartfromequities,equityETFs,commodityETFs,oroptions.
InthisnewstrategyguidebookfromConnorsResearch,youwillseea
focusontheVXX,asitwasoneoftheearliestvolatilityproductsonthe
market(meaningwehavethemostdataavailableforbacktesting).VXX
alsohashighertradingvolumethanitspeers.
TheVXXTrendFollowingStrategyprovidesyouwithprecise,quantified
rulesforenteringandexitingyourtrades.31/2yearsofsimulatedhistoricalresultsallowyou
toevaluatehoweffectivedifferentvariationsofthestrategyhavebeenoverthelifetimeof
VXX.
OrderTheVXXTrendFollowingStrategy
TheVXXTrendFollowingStrategywillmakeyouabetter,morepowerfultrader.
Ifyouarelookingtotradequantified,rulebasedstrategiesavailabletoindividualtraders,order
TheVXXTrendFollowingStrategy.
ToorderyourcopyofTheVXXTrendFollowingStrategy,pleaseclickhereorcalltollfree1
8884848220ext.3(outsidetheUSpleasecall9734947311ext.3).