Disclaimer

This educational content is for informational purposes only and does not constitute financial advice. Past performance is not indicative of future results. Trading involves risk of loss. You should consult a qualified financial advisor before making investment decisions. Swingfolio is a trade journaling tool, not a financial advisory service.

The RSI-2 Strategy (Larry Connors)

The RSI-2 strategy is one of the most extensively backtested short-term mean-reversion strategies in existence. Developed by Larry Connors, the core idea: when a stock in a long-term uptrend experiences a sharp, temporary pullback, it tends to bounce. The 2-period RSI quantifies that pullback with remarkable precision.

The Philosophy

Most traders use 14-period RSI with 70/30 levels. Connors shortened RSI to just 2 periods with extreme thresholds (10/90 instead of 30/70), catching aggressive short-term pullbacks within longer-term trends.

The Complete Rules

Indicators Required

Long Entry Rules

All conditions must be met on the same day:

Long Bias

The long side (buying pullbacks in uptrends) has historically been more profitable than the short side. Most RSI-2 practitioners focus on longs, especially in stocks and ETFs.

Exit Rules

Longs: Exit when price closes above the 5-day SMA (alternative: above 10-day SMA for more room)
Time stop: If no exit condition after 10 trading days, exit at market close on day 10

Stop-Loss: The Controversial Part

Connors' backtesting shows that adding a fixed stop-loss reduces the strategy's profitability. The strategy buys stocks that are already oversold. A fixed stop triggers at the point of maximum pessimism, right before the bounce.

Risk management without a fixed stop:

Position Sizing Is Your Stop

If you are not comfortable without a fixed stop, add one at 3x ATR below entry. Your results may differ from the pure backtest, but risk management always comes first. Apply your L4 position sizing rules.

Performance Expectations

Average holding period: 2-4 days
Win rate: 65-75% (on stocks above 200-SMA)
Average win: +1.5% to +3%
Average loss: -1% to -2%
Profit factor: 1.8 - 2.5
Trades per month: 3-8 (depends on market conditions)

What It Works On

Variations

Cumulative RSI-2. Sum the last 2 RSI-2 daily readings. A cumulative reading below 10 provides a different signal set than a single-day reading, filtering out less extreme pullbacks.

Layered Entries. Buy 50% when RSI-2 drops below 10. Add 50% if it drops below 5 the next day. This gives a better average price on deeper pullbacks while still getting exposure on shallower ones.

Weekly RSI-2. Apply the same logic to weekly bars for a longer-term mean-reversion strategy with 1-3 week holding periods instead of 2-4 days.

Strategy developed by Larry Connors. First published in Short Term Trading Strategies That Work (2008). All strategy details presented for educational purposes.

Key Takeaways

RSI-2 buys oversold pullbacks in long-term uptrends using three indicators: 2-period RSI, 200-day SMA, 5-day SMA
Long entry: above 200-SMA, below 5-SMA, RSI-2 below 10. Exit: close above 5-SMA (typically 2-4 days)
Fixed stops reduce profitability in backtesting; risk is managed through position sizing
Win rate of 65-75% makes this psychologically easier than trend-following systems
Works best on liquid large-caps and major ETFs in established uptrends

Try This

20 XP

Open a chart of SPY and add a 2-period RSI, 200-day SMA, and 5-day SMA. Scroll back 6 months and identify 3 instances where all long entry conditions were met. For each, track when the exit signal (close above 5-SMA) triggered. What was the average holding period and result?

Track RSI-2 Trades Systematically

Track RSI-2 trades systematically in Swingfolio with built-in R-multiple and expectancy calculations.

Start Tracking Free

Disclaimer