ConnorsRSI Pullbacks Guidebook PDF

ConnorsResearchTradingStrategySeries
AnIntroductionto
ConnorsRSI
By
ConnorsResearch,LLC
LaurenceConnors
CesarAlvarez
MattRadtke
P a g e |2
Copyright 2012, Laurence A. Connors and Cesar Alvarez.

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This document cannot be reproduced without the expressed written permission of Connors Research, LLC.
Copyright 2012, Laurence A. Connors and Cesar Alvarez. All Rights Reserved.
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Table of Contents
Section1TheConnorsRSIIndicator.........................................................5
Section2ConnorsRSIPullbackStrategyRules.......................................11
Section3TheRoleofExits.....................................................................18
Section4TestResults............................................................................21
Section5TradingOptionsUsingtheConnorsRSIPullbackStrategy......30
Section6AdditionalThoughts...............................................................34
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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
1
2
3
4
5
6
7
8
ClosingPrice
$20.00
$20.50
$20.75
$19.75
$19.50
$19.35
$19.35
$19.40
StreakDuration
1
2
1
2
3
0
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,bringingtheStreakDurationvaluebackto
1.
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,ourresearchhasshownthesuperiorityofthe
ConnorsRSIindicatoroverasimpleRSIcalculationonprice,orevenacombinationofthethree
indicatorstogether.WelltalkabitmoreaboutthisintheTestResultssectionoftheguidebook.
***
Pullbacktradingisoneofthemostpopularformsoftrading.Thegoodnewsisthatwhenitsdone
correctlyitcanbeverylucrative.Thenotsogoodnewsisthatoverthepasttwodecadestherehasbeen
aproliferationofpublishedpullbackstrategieswhichhavelittleornoedgeatall.
InthisStrategyGuide,wewillpresentastrategywhichutilizesConnorsRSIincombinationwithother
indicatorstoidentifywhenapullbackhasoccurred.Eachoftheseindicatorsandtheircontributionto
thestrategywillbedescribedinthenextchapter.Multipleexittriggerswerealsotested,allowingyou
toselectavariationofthestrategythatcomplementsyouroveralltradingplan.
Beforewegoon,letslookatexactlywhatapullbackisandwhyitsimportant.
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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(2001throughmid2012).Suchsolid
resultsindicatethatwearenotsimplycurvefittingorcherrypicking.
Whentradingshorttermpullbacks,thebestresultsoccurwhenyouholdthepositionforatleastafew
days.Oftenstockspullbacksharplyandsnapbackstrongly.Thereisnowayofknowingaheadoftime
howfarthatupwardmovewillbe,soitiscrucialtohavewelldefinedexitrulesinplacewhichallowfor
therallytoplayout.
NowletsmoveontotheConnorsRSIPullbackStrategyrules.
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ConnorsRSIPullback
StrategyRules
Section2
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Aswithallofourstrategies,inthisguidebookwewillpresentyouwithquantifiedrulesforenteringand
exitingtrades.Inaddition,wewillshowyouhowdifferentvariationsoftheruleshaveperformedover
time,sothatyoucanselectthevariationsthatbestcomplementyourowntradingplan.
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=5,6,715.
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.
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%
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WhileRule4tellsusthatthestockstumbled,Rule5letsusknowthatitdidnotrecoversignificantly
beforetheendofthetradingday,whichinturnisagoodindicatorthatthepriceislikelytofallfurther
tomorrow.
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
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Onthechartabove,thetoppaneshowsthepricebarsinblack,theverticalgraylinemarksthecurrently
selecteddaywhichisalsothesetupday,thegreenuparrowindicatestheentryday,andthereddown
arrowindicatestheexitday.Themiddlepanedisplaysthevolumeasverticalblackhistogrambars,and
showsthe21daymovingaverageofvolumeasagreenline.ThebottompaneshowsConnorsRSIasa
redline,andADXasablueline.Nowwellconfirmthateachofourentryandexitconditionswere
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:
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$5.91x(100%8%)=$5.91x0.92=$5.44
Theactuallowpriceon5/18/2012was$5.42,whichmeetsourcriteriawithtwocentstospare.We
wouldenterthistradewhenourbuyordergetsfilledatthelimitpriceof$5.44.
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:
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Figure2:TradesignalsforWHX
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
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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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Section3
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:
P a g e |20
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.
P a g e |21
Section4
TestResults
P a g e |22
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
September2012,thelatestdateforwhichwehavedataasofthiswriting.Finally,weapplyourentry
andexitrulestoeachstockfortheentiretestperiod,recordingdataforeachtradethatwouldhave
beenentered,andaggregatingalltradedataacrossaspecificstrategyvariation.
OneofthekeystatisticsthatwecangleanfromthebacktestresultsistheAverage%Profit/Loss,also
knownastheAverageGainperTrade.Sometradersrefertothisastheedge.TheAverage%P/Lis
thesumofallthegains(expressedasapercentage)andallthelosses(alsoasapercentage)dividedby
thetotalnumberoftrades.Considerthefollowingtentrades:
TradeNo.
1
2
3
4
5
6
7
8
9
10
%GainorLoss
1.7%
2.1%
4.0%
0.6%
1.2%
3.8%
1.9%
0.4%
3.7%
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,whichwelldiscussshortly.
AnotherimportantstatisticistheWinningPercentage.Thisissimplythenumberofprofitabletrades
dividedbythetotalnumberoftrades.Inthetableabove,7ofthe10tradeswereprofitable,i.e.had
positivereturns.Forthisexample,theWinningPercentageis7/10=70%.
P a g e |23
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
472
557
628
706
796
588
869
473
870
473
697
999
734
558
786
655
668
1120
473
883
Avg
%P/L
14.97
14.70
14.66
14.63
14.04
13.87
13.76
13.72
13.72
13.64
13.61
13.56
13.51
13.47
13.47
13.40
13.34
13.32
13.29
13.19
Avg
Days
Held Win%
7.03
78.81
7.16
78.64
7.21
78.66
7.34
78.33
7.41
77.39
7.01
78.40
7.50
77.33
3.21
79.70
7.29
77.47
2.14
80.55
7.11
78.48
7.45
76.88
7.34
76.57
3.23
79.75
7.21
78.37
7.06
78.17
7.08
78.29
7.58
76.70
1.84
80.34
7.33
77.35
Sell
Off%
8
8
8
8
8
6
8
8
8
8
6
8
8
8
6
4
2
8
8
6
Closing
Range
10
10
10
10
10
10
10
10
25
10
10
25
25
10
10
10
10
25
10
10
Connors
RSIEntry
5
6
7
8
9
5
10
5
6
5
6
7
5
6
7
5
5
8
5
8
Entry
Limit
10
10
10
10
10
10
10
10
10
10
10
10
10
10
10
10
10
10
10
10
ExitMethod
CRSI(3,2,100)>80
CRSI(3,2,100)>80
CRSI(3,2,100)>80
CRSI(3,2,100)>80
CRSI(3,2,100)>80
CRSI(3,2,100)>80
CRSI(3,2,100)>80
CRSI(3,2,100)>70
CRSI(3,2,100)>80
CRSI(3,2,100)>60
CRSI(3,2,100)>80
CRSI(3,2,100)>80
CRSI(3,2,100)>80
CRSI(3,2,100)>70
CRSI(3,2,100)>80
CRSI(3,2,100)>80
CRSI(3,2,100)>80
CRSI(3,2,100)>80
CRSI(3,2,100)>50
CRSI(3,2,100)>80
Hereisanexplanationofeachcolumn:
#TradesisthenumberoftimesthisvariationtriggeredfromJanuary1,2001September30,2012.
Average%P/Listheaverageprofitorlossforalltrades,includingthelosingtrades,expressedasa
percentage.Thetop20variationshaveallshownpositivegainsranging13%tonearly15%.
P a g e |24
AverageDaysHeldisthenumberofdaysonaveragethetradewasheld.Inallcasesitseightdaysor
less.
Win%isthepercentageofsignalswhichclosedoutataprofit.Thetop20variationshaveallbeeninthe
75%80%range,anextremelyhighlevelinaworldwheremostsuccessfultradershopetobecorrect
55%60%ofthetime.
SellOff%correspondstoRule4ofthestrategy.Itistheminimumrequireddropinpriceonthesetup
day,expressedasapercentage.
ClosingRangeisspecifiedbyRule5ofthestrategy.Itisthemaximumalloweddifferencebetweenthe
closingpriceandthelowpriceoftheday,expressedasapercentageofthetotaldailyrange(high
low).
ConnorsRSIEntryisthemaximumallowedConnorsRSI(3,2,100)valueonthesetupday.Thisvalue
correspondstoRule6ofthestrategy.
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
consistentbehaviorovermorethanadecade.Thekeyistochoosethevariationorvariationsthatbest
complementyouroveralltradingplanandthenapplytheminasystematic,structuredmanner.
Nowletsnowlookatthe20highestperformingvariationsasmeasuredbypercentagecorrect.
P a g e |25
Top20VariationsBasedonWin%
#
Trades
473
473
874
558
1085
589
1272
1041
1015
1234
737
1004
707
909
558
473
670
910
589
657
Avg
%P/L
13.64
13.29
12.81
13.17
11.97
12.48
11.21
11.79
11.89
11.36
13.00
12.30
12.74
12.36
13.47
13.72
12.06
12.01
12.66
12.13
Avg
Days
Held Win%
2.14
80.55
1.84
80.34
3.24
80.21
2.18
80.11
3.22
80.09
1.82
79.97
3.17
79.95
3.07
79.92
3.07
79.90
3.17
79.90
3.21
79.78
3.34
79.78
3.30
79.77
3.14
79.76
3.23
79.75
3.21
79.70
1.80
79.70
1.77
79.67
2.15
79.63
1.80
79.60
Sell
Off%
8
8
8
8
6
6
2
2
4
4
8
8
8
6
8
8
2
6
6
4
Closing
Range
10
10
25
10
25
10
25
25
25
25
25
25
10
25
10
10
10
25
10
10
Connors
RSIEntry
5
5
6
6
6
5
6
5
5
6
5
7
8
5
6
5
5
5
5
5
Entry
Limit
10
10
10
10
10
10
10
10
10
10
10
10
10
10
10
10
10
10
10
10
ExitMethod
CRSI(3,2,100)>60
CRSI(3,2,100)>50
CRSI(3,2,100)>70
CRSI(3,2,100)>60
CRSI(3,2,100)>70
CRSI(3,2,100)>50
CRSI(3,2,100)>70
CRSI(3,2,100)>70
CRSI(3,2,100)>70
CRSI(3,2,100)>70
CRSI(3,2,100)>70
CRSI(3,2,100)>70
CRSI(3,2,100)>70
CRSI(3,2,100)>70
CRSI(3,2,100)>70
CRSI(3,2,100)>70
CRSI(3,2,100)>50
CRSI(3,2,100)>50
CRSI(3,2,100)>60
CRSI(3,2,100)>50
Whenlookingatthevariationswhichhavebeencorrectthemostoften,weseeabroaderarrayof
strategyparameters.However,theWinRatesareallverycloseto80%forthetimeperiodfrom2001
throughSeptember2012.Suchconsistentresultsfromavarietyofstrategyvariationsoveralongperiod
oftimeconfirmtherobustnatureoftheConnorsRSIPullbackstrategy.
Forsometraders,themostimportantmetricsforevaluatingastrategymayrevolvearoundcapital
management.Forthesetraders,itsacceptabletogiveupaportionofthegainsiftheycangettheir
moneybackmorequicklysothatitcanbedeployedelsewhere.So,letstakealookatthestrategy
variationsthathavetheshortesttradedurationsasmeasuredbyAverageDaysHeld.
P a g e |26
Top20VariationsBasedonAverageDaysHeld
#
Trades
1042
1016
910
1273
738
1235
670
657
1474
1497
1451
1086
1419
1619
1694
589
875
1242
1281
1826
Avg
%P/L
11.47
11.57
12.01
10.54
12.61
10.68
12.06
12.13
9.62
9.03
9.13
11.27
9.74
9.12
8.95
12.48
12.09
10.29
9.54
8.29
Avg
Days
Held Win%
1.75
79.46
1.75
79.43
1.77
79.67
1.78
77.77
1.79
79.40
1.79
77.65
1.80
79.70
1.80
79.60
1.80
76.19
1.80
76.09
1.80
75.88
1.81
77.99
1.81
76.04
1.81
75.36
1.81
75.27
1.82
79.97
1.82
78.40
1.82
76.25
1.82
75.64
1.82
74.92
Sell
Off%
2
4
6
2
8
4
2
4
2
2
4
6
4
4
2
6
8
6
6
2
Closing
Range
25
25
25
25
25
25
10
10
25
25
25
25
25
25
25
10
25
25
25
25
Connors
RSIEntry
5
5
5
6
5
6
5
5
7
5
5
6
7
8
8
5
6
7
5
6
Entry
Limit
10
10
10
10
10
10
10
10
10
8
8
10
10
10
10
10
10
10
8
8
ExitMethod
CRSI(3,2,100)>50
CRSI(3,2,100)>50
CRSI(3,2,100)>50
CRSI(3,2,100)>50
CRSI(3,2,100)>50
CRSI(3,2,100)>50
CRSI(3,2,100)>50
CRSI(3,2,100)>50
CRSI(3,2,100)>50
CRSI(3,2,100)>50
CRSI(3,2,100)>50
CRSI(3,2,100)>50
CRSI(3,2,100)>50
CRSI(3,2,100)>50
CRSI(3,2,100)>50
CRSI(3,2,100)>50
CRSI(3,2,100)>50
CRSI(3,2,100)>50
CRSI(3,2,100)>50
CRSI(3,2,100)>50
Asyoumightexpectfromourearlierdiscussion,thestrategyvariationswiththeshortesttrade
durationsaredominatedbythemostlenientexitthatwetested,whichisanexitwhen
ConnorsRSI(3,2,100)isgreaterthan50.All20ofthesevariationshaveaveragedurationsoflessthan
twodays.Whatyoumightnothaveexpectedistostillseeaveragegainspertradeof8%12.5%!
Letslookatonefinalwaytofiltertheresults.Inthiscase,weregoingtofocusonthetotalprofitthat
wouldhavebeengeneratedbyastrategyvariationusingthefollowingassumptions:
Everytradeentrysignalwastaken,i.e.wealwayshadsufficientcapitaltoenteratrade
Everytradeusedthesameamountofinitialcapital,forexample$1,000.
Therewerenocommissions
Obviouslythesearenotrealisticassumptionsforestimatingactualperformance.Some
variationsgenerateover1000tradesperyear,andthoseareoftenheavilyconcentratedona
handfuloftradingdays,whichmeanstheremaybedozensofentrysignalsgeneratedona
singleday.Also,itisimpossibletodeployexactlythesameamountofcapitaloneverytrade,
becausewecannotpurchasefractionalsharesofstock.Andunlessyouhaveacloserelative
P a g e |27
whoworksatamajorbrokeragefirm,youwillalwayspaycommissions.However,thisexercise
isausefulwaytocomparetheprofitpotentialofdifferentvariationsofthestrategy.
Wehavealreadytalkedaboutthenumberoftradesgeneratedbyastrategyaswellasthe
averagegain(%P/L)pertrade.Tofindthe(theoretical)total%profitwesimplymultiplythese
twovaluestogether.Inthetablebelow,theAvgDaysHeldandtheWin%havebeenreplaced
bytheTotal%Profitcolumn.Herearethetop20performersusingthismetric:
Top20VariationsBasedonTotal%Profit
#Trades
15226
13718
12537
12238
11364
16061
10880
10243
8835
14404
9563
7695
8029
9195
13213
9228
7213
16362
7034
12788
Avg
%P/L
3.49
3.60
3.90
3.82
4.00
2.71
3.99
4.22
4.82
2.82
4.24
5.26
5.04
4.35
3.02
4.32
5.43
2.34
5.41
2.97
Total%
Profit
53138.74
49384.80
48894.30
46749.16
45456.00
43525.31
43411.20
43225.46
42584.70
40619.28
40547.12
40475.70
40466.16
39998.25
39903.26
39864.96
39166.59
38287.08
38053.94
37980.36
Sell
Off%
2
2
4
2
4
2
2
4
2
2
2
4
2
4
4
6
2
2
4
2
Closing
Range
25
25
25
25
25
25
25
25
25
25
25
25
25
25
25
25
25
25
25
25
Connors
RSIEntry
15
14
15
13
14
15
12
13
15
14
11
15
14
12
15
15
13
15
14
13
Entry
Limit
4
4
4
4
4
4
4
4
6
4
4
6
6
4
4
4
6
4
6
4
ExitMethod
CRSI(3,2,100)>80
CRSI(3,2,100)>80
CRSI(3,2,100)>80
CRSI(3,2,100)>80
CRSI(3,2,100)>80
CRSI(3,2,100)>70
CRSI(3,2,100)>80
CRSI(3,2,100)>80
CRSI(3,2,100)>80
CRSI(3,2,100)>70
CRSI(3,2,100)>80
CRSI(3,2,100)>80
CRSI(3,2,100)>80
CRSI(3,2,100)>80
CRSI(3,2,100)>70
CRSI(3,2,100)>80
CRSI(3,2,100)>80
CRSI(3,2,100)>60
CRSI(3,2,100)>80
CRSI(3,2,100)>70
Thisgivesusaverydifferentsetofvariationsthanweveseenintheprevioustables.Asyou
cansee,thislistisdominatedbythevariationsthatgenerateahighnumberoftrades,whichis
primarilytheresultofusingmoreleniententrycriteria.Thisiswhatwemeantwhenwesaid
earlierthatgeneratingprofitsisntallaboutfindingthestrategyvariationswiththehighest
Average%P/L.Itsimportanttounderstandallthefactorsthataffectthestrategy,andchoose
accordingly.
P a g e |28
***
InSection1,wemadetheassertionthattheConnorsRSIindicatorissuperiortoacombinationofthe
threecomponentindicatorsusedindependently.LetstestthatassertionusingthesameTotal%Profit
approachthatwejustdiscussed.
Lookbacktoourfirsttableoftestresults,whichrankedthevariationsbyhighestAverage%P/L.About
athirdofthewaydownthelist,youwillseeavariationwiththefollowingparameters:
SellOff=8%
ClosingRange=10%
ConnorsRSI=10
EntryLimit=10%
Exit=ConnorsRSI>80
WhilethisvariationmadetheTop20listforAverage%P/L,itdidnotappearinanyofourotherTop20
lists.Fromthatperspective,itsnothingspecial;justonemoderatelywellperformingvariationamong
many.TheTotal%Profitforthisstrategywouldbethenumberoftrades(869)multipliedbythe
Average%P/L(13.76),whichgivesaresultof11957.44%.
NowletsseewhathappensifwereplaceConnorsRSI<10withdifferentcombinationsofRSI(Close,3),
RSI(Streak,2),andPercentRank(100).Foreachofthesethreeindicators,wetestedvaluesfrom5to20,
ineverypossiblecombination.Allotherparameterswereheldconstant.HerearetheTop20results
rankedbyTotal%Profit:
P a g e |29
Top20AlternateVariationsBasedonTotal%Profit
#Trades
913
911
907
903
896
896
894
891
887
880
879
878
877
875
871
870
869
865
864
863
Avg
%P/L
12.66
12.72
12.92
12.91
12.98
12.92
12.99
13.08
13.07
13.14
12.98
12.9
13.05
13.14
13.13
12.89
12.88
13.09
13.2
13.05
Total%
Profit RSI(Close,3) RSI(Streak,2) PercentRank(100)
11559
20
20
20
11588
20
20
18
11718
20
20
16
11658
20
20
14
11630
20
20
12
11576
18
20
20
11613
18
20
18
11654
18
20
16
11593
18
20
14
11563
18
20
12
11409
16
20
20
11326
20
20
10
11445
16
20
18
11498
16
20
16
11436
16
20
14
11214
20
18
20
11193
20
18
18
11323
20
18
16
11405
16
20
12
11262
18
20
10
Althoughsomeofthealternatevariationscameclose,noneofthemwasabletobestthetotalprofitof
thevariationusingConnorsRSI(3,2,100).ThisisjustonemorewayofshowingthattheConnorsRSI
indicatorisarobust,versatiletoolforyourtradingtoolbox.
P a g e |30
TradingOptionsUsing
theConnorsRSI
PullbackStrategy
Section5
P a g e |31
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?
Inthiscaseitsdefinedasonetotwostrikepricesinthemoney.Ifthestockisat48,buythe40or45
calls.
P a g e |32
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.
P a g e |33
Theaboveoptionsstrategy,inmanyexpertsopinion,isthebestandmostefficientstrategybasedupon
thehistoricaldatafromthesesignals.
P a g e |34
AdditionalThoughts
Section6
P a g e |35
1.AsyouhaveseenthroughoutthisGuidebook,theConnorsRSIPullbackstrategyhashadlarge
quantifiededgeswhenappliedinasystematicmanner.
2.Thereareliterallyhundredsofpotentialvariationsforyoutouse.Byadjustingtheinputvariables
describedintherules,youcancustomizehowtheConnorsRSIPullbackstrategywillperformforyou.
Wantmoretrades?LookatvariationswithasmallerSellOff%orEntryLimit.Biggeraveragereturns?
Checkoutthevariationsthathavethestrictestentrycriteria(highSellOff%andEntryLimit%and/or
lowentryvalueforConnorsRSI)andlongestdurations(ConnorsRSI80exitmethod).Wanttogetinand
outoftradesmorequicklytoreduceovernightriskandfreeupyourcapitalforothertrades?Trythe
variationsthatutilizetheConnorsRSI50exitmethod.Onceyouunderstandhowthestrategyvariables
affecttheresults,youcanidentifythevariationorvariationsthatbestfityourtradingstyle.
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.
WehopeyouenjoyedthisadditiontotheConnorsResearchTradingStrategySeries.Ifyouhaveany
questionsaboutthisstrategypleasefeelfreetoemailusatinfo@connorsresearch.com
P a g e |36
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Asanactivetrader,youarenotcontentwithreturnspeggedtothemarketindexes.Youdemand
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callreturnsabovethebenchmarkmarketindices.
Mosthedgefundsrelyonagilitytooutperformthemarket.Theyimplementnewstrategiesconstantly.
Andinorderforyou,asanindividualtrader,tobeatthoseindicestogenerateyourownalphayou
aremostlikelyalsoalwayslookingfornewtradingstrategies.
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shownsignificant"alpha"insimulated,backtestedresultsoverseveralyears.
Here'showitworks:
TheClubmeetsonceeachmonth,online.Themeetingsrunabout12hoursandareledbyLarry
Connorsandhisresearchteam.
Youwilllearnonenewstrategyeachmonth.Larryandhisresearchteamwillcoverthebackground,
simulatedhistoricalresults,quantifiedperformancemetrics,andimplementationrulesforevery
strategy.
EverystrategywillbedistributedexclusivelytoClubMembersonly.Thesestrategieswillnotbe
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Timewillbeallottedateverymeetingtodiscussfeedbackandquestionsfrommembersabout
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Everysessionwillberecordedforyourconveniencetowatchagain(orifyoucan'tattendthelive
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TherearetwoAlphaClubtracksforyoutochoosefrom:
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Bestofall,youwon'tneedtogosearchingfornewtradingstrategiesyoucantrust,wewillbringthem
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aTradingMarketsAlphaClubmember,everymonthyouwillreceiveanew,quantified,rulesbased
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AbouttheStrategies&ResearchYouWillReceive
EachMonth
Thestrategiesandresearchwillbebrandnew,basedonunpublishedresearch.
Everystrategywillincludefulldisclosureonthebacktested,simulatedhistoricalresultsderived
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Precisetradingrulesandthetoolstoexecutethestrategieswillbeprovidedtoyoueachmonth.
TradingMarketsAlphaClubisaUniqueOpportunity
Theinternetisfilledwithpeopletoutingpersonalopinions.Thereisverylittlecredible
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TradingMarketsAlphaClubgivesyoutheopportunitytoworkdirectlywithLarryandhisresearch
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Ifyouareseriousaboutyourtrading,youneedthesametypeofconsistenttrainingasprofessional
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TradingwithBollingerBandsAQuantifiedGuide
ThisSystematicApproachtoTradingwithBollingerBandsBringsYouResultsQuickly
BollingerBandsareusedbyhundredsofthousandsoftradersaroundtheworld.Infact,itsconsidered
oneofthemostpowerfultradingtoolsavailabletotraders.Overthepasttwodecadesmany
professionaltradersatlargefunds,successfulCommodityAdvisors,andprofessionalEquityTraders
havestatedtheyrelyuponBollingerBandsasoneofthemainindicatorsbeforetheytakeatrade.
Whentradedcorrectly,BollingerBandscanbeoneofthemostconsistentstrategiesavailableforyour
trading.
Nowforthefirsttime,wearemakingavailabletothepublicafullysystematic,quantifiedapproachto
tradingwithBollingerBands.
ConsistentTradingResultsWhatyouwilllearnwiththisstrategyaredozensofBollingerBandsstrategy
variationswhichhavebeencorrectfrom65.43%uptoover82.74%fromJanuary2001toMay2012.
TheTradingwithBollingerBandsAQuantifiedGuidecomeswitha100%MoneyBackGuarantee(as
doalltheGuidebooksinourStrategySeries).
IfyouwouldlikemoreinformationonTradingwithBollingerBandsAQuantifiedGuideclickhere.If
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P a g e |41
TheLongPullbacksStrategy
In2005wepublishedwhatweconsidertobeourmostpowerfulshorttermtradingstrategythatwe
originallynamedthe5x5x5Strategy.Manyhundredsoftraderslearnedthestrategyandmanystilluseit
today.Sincethattimewehaveupdatedandimprovedthestrategy,addednewentryparameters,added
newexitstrategies,andhaveupdatedthetraderesultsbeginningfrom20012011.
Whatyouwilllearnwiththisstrategyaremanyhundredsofvariationsthathavebeencorrectfrom
72.4%uptoover78%formorethanadecade.Andtheaveragegainpertrade(thisincludesallwinning
andlosingtrades)hasaveragedover5.6%atradeondozensofvariationsofthestrategy.
Youwilllearnhowtoidentifythesetup,select,theentrylevel,wheretoplacetheorderandwhereto
exittheorder.ThisisdoneonallliquidUSstocks(anditcanbedoneonglobalmarketsaswell).Andas
anaddedbonuswealsoaddedadaytradingcomponenttothisstrategyforthoseofyouwholiketoexit
positionsbeforethecloseeachday.
TheLongPullbacksStrategycomeswitha100%MoneyBackGuarantee(asdoalltheGuidebooksinour
StrategySeries).
IfyouwouldlikemoreinformationonTheLongPullbacksStrategyclickhere.Ifyouwouldliketoorder
anddownloaditnowsoyoucanhaveimmediateaccesstoitpleaseclickhereorcalltollfree888484
8220ext.627(outsidetheUSpleasedial9734947333).
P a g e |42
ETFGapTrading:ADefinitiveGuide
IfyoutradeETFsyouwillsoonseethattradingGapsonETFs,whendonecorrectly,canbetheoneof
themostprofitablestrategiesavailabletoyouinETFTrading.
TheaveragegainspertradefromtradingthegapsastaughtinthisSeriesrangesallthewayuptoover
4%pertrade(asubstantialnumberforETFs).AndweaddedaLeveragedETFsectionwheretheaverage
gainsgetabove5.5%trade.
HistoricallythemajorityoftheETFGapsetupshavebeencorrect7177%ofthetime.AndliketheLong
PullbackStrategieswevealsoaddedadaytradingaspecttotradinggapswhichallowyoutodaytrade
ETFsbothonthelongandtheshortside.
TheETFGapTradingStrategyalsocomeswitha100%MoneyBackGuarantee.
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orderanddownloaditnowsoyoucanhaveimmediateaccesstoitpleaseclickhereorcalltollfree888
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P a g e |43
HowtoTradeHighProbabilityStockGaps
GapTradingIsACoreStrategyForMostSuccessfulTradersDoYouTradeStockGaps?
Forthreedecades,gaptradinghasbeenoneofthemostpopularandsuccessfulstrategiesfortraders
whohaveidentifiedwhenandhowtotradestockgaps.Theproblemisthatthereareliterallythousands
ofgapseveryyear.Sohowdoestheaveragetraderknowwhichonestotrade,wheretoenterthemand
wheretoproperlyexitthepositions?
Nowforthefirsttime,youhavetheopportunitytolearnwhatmanyprofessionalsalreadyknowabout
gaptrading:whenitsdonecorrectly,itcanbeextremelylucrative.
IfIcouldonlytradeonestrategy,itwouldbeearlymorninggaps
KevinHaggertyFormerHeadofTradingFidelityCapitalMarkets
HowtoTradeHighProbabilityStockGapsalsocomeswitha100%MoneyBackGuarantee.
IfyouwouldlikemoreinformationontheHowtoTradeHighProbabilityStockGapsGuidebookclick
here.Ifyouwouldliketoorderanddownloaditnowsoyoucanhaveimmediateaccesstoitplease
clickhereorcalltollfree8884848220ext.627(outsidetheUSpleasedial9734947333).

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