Connors Rs I

ConnorsResearchTradingStrategySeries
AnIntroductionto
ConnorsRSI
2
nd
Edition
By
ConnorsResearch,LLC
LaurenceConnors
CesarAlvarez
MattRadtke
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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:
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.
P a g e |21
Section4
TheRoleofExits

P a g e |22
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 |23
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 |24
Section5
TestResults

P a g e |25
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%.
P a g e |26
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.
P a g e |27
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.

P a g e |28
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.

P a g e |29
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%!

P a g e |30
Section6
TradingOptionsUsing
theConnorsRSI
PullbackStrategy

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?
Inthiscaseitsdefinedasoneortwostrikepricesinthemoney.Ifthestockisat48andstrikesare$5
apart,thenbuythe40or45calls.
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.
IfyouwouldliketogofurtherwithOptionswerecommendourOptionsTradingwithConnorsRSI
strategyguidebook.Youcanpurchaseitdirectlyfromourwebsite:
http://store.tradingmarkets.com/ebooks/options/connorsresearchtradingstrategyseriesoptions
tradingwithconnorsrsi.html.

P a g e |34
Section7
AdditionalThoughts

P a g e |35
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.

P a g e |36
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
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
LearntheLatestAdvancestoConnorsRSItoImproveYourETFTradingAccuracy
NEWfromConnorsResearch:
TheAdvancedConnorsRSITradingStrategyforETFs
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ConnorsRSIisnowavailableonBloomberg,ScottTrade,MetaStock,
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AswecontinuetoexplorenewresearchpossibilitiesforConnorsRSIwe
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Recently,ConnorsResearchdevelopedanewConnorsRSIETFtradingstrategythatoffers:
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ThisstrategyseekstoidentifyhistoricallyhighprobabilityETFtradingsetupsandonlysignalsabuy
whenthereisbothahighprobabilityofsuccessandthepotentialforahigherthanaveragegain...with
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ThisguidebookwillteachyouexactlyhowtoapplyourlatestresearchadvanceforConnorsRSItoETFs.
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P a g e |39
Here'sHowYouCanSwingTradeS&P500StocksforShortTermGains
Introducing:S&P500TradingwithConnorsRSI
ThisguidebookwillteachyouthehowtoswingtradeS&P500stocksto
captureshorttermgainsfrommispricedopportunitiesidentifiedby
ConnorsRSI.
Theonlyquantifiedmomentumoscillator,ConnorsRSIcombinesprice,
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changeallinasingleindicator.
ConnorsRSIgivesyouaquantifiedwaytoidentifystocksmostlikelyto
reverse.Andasyouwillseefromthetestresults,especiallyona
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WithS&P500TradingwithConnorsRSI,youwillreceiveover40variationswithspecificEntry/ExitRules
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Morethanadozenvariationsshowwinningtraderatesover80%
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P a g e |40
ConnorsRSICanChangeYourEntireApproachtoOptions
NewResearchShowsHowYouCanUseConnorsRSItoImproveYourAccuracy
Introducing:OptionsTradingwithConnorsRSI
Optionstradescanhaveareputationasriskyinvestmentsamongmanyretailtraders.Thatperception
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Thisnewapproachgreatlysimplifiestheentireprocessoftradingoptions.Italsoallowsyoutoselect
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InOptionsTradingwithConnorsRSIyouwilllearnhowtoapplyasystematic,quantifiedapproachto
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P a g e |41
InterestinTradingVolatility&EspeciallyVXXisExploding
QuantifiedHistoricalTestResultsShowPossibilitiesforImpressiveGainsfrom
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Introducing:TheVXXTrendFollowingStrategy
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