Description: Larry Connors’ 2 period RSI trading strategy is a short-term mean reversion trading technique that looks for buying and selling opportunities within a well defined trend.
Connors’ 2 period RSI trading strategy involves four steps. They are as follows:
Step 1. Identify the Long Term Trend
The first step in the RSI 2 period trading strategy involves looking for the prevailing longer term trend. Connors recommended using the 200-day simple moving average (SMA) for the purpose. When prices are trading above the 200 day SMA, we consider the security to be in a long–term uptrend and hence we trade from the long side only. Similarly, when prices are trading below the 200 SMA, we consider the security to be in a long-term downtrend and hence we trade from the short side only.
Step 2. Selecting RSI 2 Thresholds
The second step involves deciding upon the overbought and oversold threshold limits for the 2 period RSI. Connors recommended looking for buying opportunities on a dip below 5 and selling opportunities on a surge above 95.
Step 3. Timing the Trade
The third step of the RSI 2 period trading strategy deals with the actual timing of the entries for the trades. Connors advocated taking positions just before the closing.
Step 4. Exiting the Trade
Connors recommended exiting the long trades on an advance over the 5-period SMA. Similarly, he recommended closing out short positions on a decline below the 5 SMA.
Connors didn’t recommend using any stop-loss levels as he found that they resulted in drawdowns.
Let’s now take some examples to understand the Connors RSI 2 trading strategy better.
In the above daily chart of ACC Ltd, we can see that prices are trading above the 200 SMA hence the longer term trend is up and trades are to be considered from the long side only. We go long as the 2 period RSI dipped below the 5 level oversold threshold limit. All the three trades produced nice trading profits.
In the above daily chart of Aurobindo Pharma, we can see that prices are trading below the 200 SMA hence the longer term trend is down and trades are to be considered from the short side only. We go short as the 2 period RSI surges above 95 overbought threshold limit. All the short set-ups turned out to be nice short term trading opportunities.
To conclude, we can say that Connors RSI 2 trading strategy is a very effective trading system and is suitable for aggressive short-term traders. However, there are some other time tested and proven trading strategies which when combined with the 2 period RSI strategy can yield phenomenal trading results.
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