ConnorsRSI Pullbacks Guidebook

ConnorsResearchTradingStrategySeries
AnIntroductionto ConnorsRSI
By ConnorsResearch,LLC LaurenceConnors CesarAlvarez MattRadtke
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Copyright 2012, Connors Research, LLC. ALL RIGHTS RESERVED. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher and the author. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is sold with the understanding that the author and the publisher are not engaged in rendering legal, accounting, or other professional service. Authorization to photocopy items for internal or personal use, or in the internal or personal use of specific clients, is granted by Connors Research, LLC, provided that the U.S. $7.00 per page fee is paid directly to Connors Research, LLC, 1-973-494-7333. ISBN 978-0-9853072-9-5 Printed in the United States of America.
This document cannot be reproduced without the expressed written permission of Connors Research, LLC. Copyright 2012, Connors Research, LLC. All Rights Reserved.
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Disclaimer
By distributing this publication, Connors Research, LLC, Laurence A. Connors, Cesar Alvarez, and Matt Radtke (collectively referred to as Company") are neither providing investment advisory services nor acting as registered investment advisors or broker-dealers; they also do not purport to tell or suggest which securities or currencies customers should buy or sell for themselves. The analysts and employees or affiliates of Company may hold positions in the stocks, currencies or industries discussed here. You understand and acknowledge that there is a very high degree of risk involved in trading securities and/or currencies. The Company, the authors, the publisher, and all affiliates of Company assume no responsibility or liability for your trading and investment results. Factual statements on the Company's website, or in its publications, are made as of the date stated and are subject to change without notice. It should not be assumed that the methods, techniques, or indicators presented in these products will be profitable or that they will not result in losses. Past results of any individual trader or trading system published by Company are not indicative of future returns by that trader or system, and are not indicative of future returns which be realized by you. In addition, the indicators, strategies, columns, articles and all other features of Company's products (collectively, the "Information") are provided for informational and educational purposes only and should not be construed as investment advice. Examples presented on Company's website are for educational purposes only. Such set-ups are not solicitations of any order to buy or sell. Accordingly, you should not rely solely on the Information in making any investment. Rather, you should use the Information only as a starting point for doing additional independent research in order to allow you to form your own opinion regarding investments. You should always check with your licensed financial advisor and tax advisor to determine the suitability of any investment. HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN INHERENT LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL TRADING AND MAY NOT BE IMPACTED BY BROKERAGE AND OTHER SLIPPAGE FEES. ALSO, SINCE THE TRADES HAVE NOT ACTUALLY BEEN EXECUTED, THE RESULTS MAY HAVE UNDER- OR OVER-COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEYARE DESIGNEDWITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN. Connors Research 10 Exchange Place Suite 1800 Jersey City, NJ 07302
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Table of Contents
Section1TheConnorsRSIIndicator.........................................................5 Section2ConnorsRSIBasePerformance...............................................10 Section3ConnorsRSIPullbackStrategyRules.......................................14 Section4TheRoleofExits.....................................................................21 Section5TestResults............................................................................ 24 Section6TradingOptionsUsingtheConnorsRSIPullbackStrategy ......30 Section7AdditionalThoughts...............................................................34
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Section1
TheConnorsRSI Indicator

P a g e |6 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

P a g e |7 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

P a g e |8 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

P a g e |9 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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ConnorsRSIBase Performance
Section2

P a g e |11 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.ThisprocesswasrepeatedforeverytradingdaythroughJuly31,2012. Next,foreachofthe20bucketswecalculatedthefivedayreturnofeachstockforeverydayinthetest period,andaveragedthosevaluesforeachofthe20buckets.Insimpleterms,wedeterminedthe typical5daypricemove(asapercentage)ofastockwhoseConnorsRSIvaluefellintoaparticular bucket. Weexpectedthatstocksthatwereoversold(thosewithlowConnorsRSIvalues)wouldincreaseinprice, whilethosethatwereoverboughtwoulddecreaseinprice.Asyoucanseeinthetablebelow,thisis exactlywhathappened.
P a g e |12 ConnorsRSI(3,2,100) Bucket 0 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 95 YoucanseethatastheConnorsRSIvaluegoesbelow20,the5dayreturnsbegintoincrease substantially.StockswithaConnorsRSIvalueintherangeof0to5(the0bucket)experiencedan averagepriceincreaseof2.28%overthenextfivetradingdays. WeseetheinversebehavioratthetopendoftheConnorsRSIrange:asthevaluemovesabove80,the 5dayreturnsareincreasinglynegative,withstocksinthe95bucketshowinga1.42%pricedecrease overthefollowingfivedays. Forthoseofyouwhoaremorevisuallyoriented,thechartbelowshowsthesameinformationasthe tableabove:
5DayReturn 2.28% 1.18% 0.56% 0.41% 0.31% 0.20% 0.23% 0.20% 0.14% 0.13% 0.28% 0.32% 0.21% 0.18% 0.08% 0.02% 0.04% 0.14% 0.46% 1.42%
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2.50%
2.00%
5DayReturnofStockswitha ConnorsRSI(3,2,100)ValueofX
1.50%
1.00%
0.50%
0.00% 0 0.50% 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 95
1.00%
1.50%
2.00%
NowthatwevelookedatConnorsRSIinisolation,letsmoveontotheConnorsRSIPullbackStrategy rulestoseehowtheindicatorperformsaspartofacompletesystem.
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Section3
ConnorsRSIPullback StrategyRules
P a g e |15 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(2001throughmid2012).Suchsolid resultsindicatethatwearenotsimplycurvefittingorcherrypicking. Whentradingshorttermpullbacks,thebestresultsoccurwhenyouholdthepositionforatleastafew days.Oftenstockspullbacksharplyandsnapbackstrongly.Thereisnowayofknowingaheadoftime howfarthatupwardmovewillbe,soitiscrucialtohavewelldefinedexitrulesinplacewhichallowfor therallytoplayout. NowletsmoveontotheConnorsRSIPullbackStrategyrules.Aswithallofourstrategies,inthis guidebookwewillpresentyouwithquantifiedrulesforenteringandexitingtrades.Inaddition,wewill showyouhowdifferentvariationsoftheruleshaveperformedovertime,sothatyoucanselectthe variationsthatbestcomplementyourowntradingplan.
P a g e |16 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.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.
P a g e |17 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

P a g e |18 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.
P a g e |19 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
P a g e |20 Theclosingpriceof$9.97fulfillstheRule1requirementof$5/shareorgreater. The2dayaveragevolumeof286,704meetstheRule2criteriaof250,000. TheADX(10)valueis51.60,farabovetheRule3requirementof30. Wecanseethaton7/17/2012(thedaypriortothesetupdayshownbythegrayverticalline)theprice ofWHXclosedabitabove$15,whilethelowon5/18/2012wasbelow$10.Alittlementalarithmetic tellsusthattheselloffwasover30%,sotheresreallynoneedtodotheexactmathtoverifythatweve exceededthe2%sellofftarget,thusmeetingtheRule4requirement. Likewise,itsobviousfromthechartthattheclosingpriceon7/18/2012wasinthebottom10%ofthe daysrange,satisfyingRule5. ThechartshowsusthattheConnorsRSI(3,2,100)valuewas2.55onthesetupday,whichmeansthatthe criteriaforRule6hasbeenmet. Rule7tellsustoenteralimitorder6%belowthesetupdaysclosingpriceof$9.97.Thatmeansour limitpricefor7/19/2012willbe: $9.97x(100%6%)=$9.97x0.94=$9.37
Theactualpriceon7/19/2012fallsallthewayto$8.20,butwewillenterthetradeatthelimitprice whichwedeterminedinadvance:$9.37. Finally,asperRule8,weexitthetradewhenConnorsRSI(3,2,100)closesabove70.Thisoccurstwo tradingdayslater,onMonday,7/23/2012. Inthenextsectionwelltakeacloserlookatexitmethods,andthenwelldiveintothetestresultsso thatyoucandeterminewhichstrategyvariation(s)arethebestfitforyourowntrading.
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Section4
TheRoleofExits

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 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 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%. %GainorLoss 1.7% 2.1% 4.0% 0.6% 1.2% 3.8% 1.9% 0.4% 3.7% 2.6%
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 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
# 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
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.
P a g e |27 Average%P/Listheaverageprofitorlossforalltrades,includingthelosingtrades,expressedasa percentage.Thetop20variationshaveallshownpositivegainsranging13%tonearly15%. 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 |28 Top20VariationsBasedonWin% 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
# 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
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
Entry Limit 10 10 10 10 10 10 10 10 10 10 10 10 10 10 10 10 10 10 10 10
Whenlookingatthevariationswhichhavebeencorrectthemostoften,weseeabroaderarrayof strategyparameters.However,theWinRatesareallverycloseto80%forthetimeperiodfrom2001 throughSeptember2012.Suchconsistentresultsfromavarietyofstrategyvariationsoveralongperiod oftimeconfirmtherobustnatureoftheConnorsRSIPullbackstrategy. Forsometraders,themostimportantmetricsforevaluatingastrategymayrevolvearoundcapital management.Forthesetraders,itsacceptabletogiveupaportionofthegainsiftheycangettheir moneybackmorequicklysothatitcanbedeployedelsewhere.So,letstakealookatthestrategy variationsthathavetheshortesttradedurationsasmeasuredbyAverageDaysHeld.
P a g e |29 Top20VariationsBasedonAverageDaysHeld 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
# 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
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
Entry Limit 10 10 10 10 10 10 10 10 10 8 8 10 10 10 10 10 10 10 8 8
Asyoumightexpectfromourearlierdiscussion,thestrategyvariationswiththeshortesttrade durationsaredominatedbythemostlenientexitthatwetested,whichisanexitwhen ConnorsRSI(3,2,100)isgreaterthan50.All20ofthesevariationshaveaveragedurationsoflessthan twodays.Whatyoumightnothaveexpectedistostillseeaveragegainspertradeof8%12.5%!
P a g e |30
TradingOptionsUsing theConnorsRSI PullbackStrategy

Section6
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
Section7
AdditionalThoughts
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,therearelargeedgesinstocks whichselloffandthensellofffurtherintraday.Thesetradesareoftenaccompaniedbyfearand uncertaintyandthisiswhenlargeedgesappear.Seekoutthesetradesbecause,asyouhaveseen, theyvebeenlucrativeformanyyears. WehopeyouenjoyedthisadditiontotheConnorsResearchTradingStrategySeries.Ifyouhaveany questionsaboutthisstrategypleasefeelfreetoemailusatinfo@connorsresearch.com
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ETFGapTrading:ADefinitiveGuide IfyoutradeETFsyouwillsoonseethattradingGapsonETFs,whendonecorrectly,canbetheoneof themostprofitablestrategiesavailabletoyouinETFTrading. TheaveragegainspertradefromtradingthegapsastaughtinthisSeriesrangesallthewayuptoover 4%pertrade(asubstantialnumberforETFs).AndweaddedaLeveragedETFsectionwheretheaverage gainsgetabove5.5%trade. HistoricallythemajorityoftheETFGapsetupshavebeencorrect7177%ofthetime.AndliketheLong PullbackStrategieswevealsoaddedadaytradingaspecttotradinggapswhichallowyoutodaytrade ETFsbothonthelongandtheshortside. TheETFGapTradingStrategyalsocomeswitha100%MoneyBackGuarantee. IfyouwouldlikemoreinformationontheETFGapTradingStrategyclickhere.Ifyouwouldliketo orderanddownloaditnowsoyoucanhaveimmediateaccesstoitpleaseclickhereorcalltollfree888 4848220ext.627(outsidetheUSpleasedial9734947333).
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).
P a g e |44 TheMachine:A"TurnkeySolution"ForTradersBackedByaDecadeofData
Quantifiedtradingstrategies ConsistentPerformance Eliminateemotions Savetime TheMachineallowstraderstoengineercustomizedportfoliosofquantifiedstrategies.This webbasedsoftwaregivesyouaccesstoasmanyas64backtestedstrategiesforbothstocks andETFs,bothlongandshort,forswingtrading,daytrading,andlongertimeframeactive investing.TheMachinealsoallowsyoutoeasilytradeyourportfolioinonlyafewminuteseach daywithintegratedtradeexecutioncapability. FormoreinformationandtostartyourFREEOneWeekTrialtoday,call18884848220ext.1 (international,call9734947311ext.1).
P a g e |45
DownloadtheConnorsRSIIndicatorAddon ModuleforyourTradingSoftwareNow!
WehavedevelopedConnorsRSIaddonmodulesforthefollowing tradingsoftwareplatformssothatyoucanapplytheConnorsRSI oscillatoraccordingtoyourownneeds: TradeStation AmiBroker thinkorswim Andmorearebeingaddedeveryday! Clickheretodownloadyouraddonmoduletoday!


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ConnorsResearchTradingStrategySeries

2WaystoGetConnorsRSIReadingsFREEEveryDay GetLiveConnorsRSIReadingswith TradingMarketsAnalytics

TheclosingpriceonDay2ishigherthanonDay1,sowehaveaonedayupstreak.OnDay3, thepricecloseshigheragain,sowehaveatwodayupstreak,i.e.theStreakDurationvalueis2. OnDay4,theclosingpricefalls,givingusaonedaydownstreak.TheStreakDurationvalueis

Theresultisaveryrobustindicatorthatismoreeffectivethananyofthethreecomponentsused individually.Infact,ConnorsRSIalsoofferssomeadvantagesoverusingallthreecomponentstogether. Whenweusemultipleindicatorstogenerateanentryorexitsignal,wetypicallysetatargetvaluefor

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

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.

TradingOptionsUsing theConnorsRSI PullbackStrategy

P a g e |33 Theaboveoptionsstrategy,inmanyexpertsopinion,isthebestandmostefficientstrategybasedupon thehistoricaldatafromthesesignals.

2WaystoGetConnorsRSIReadingsFREEEveryDay GetLiveConnorsRSIReadingswith TradingMarketsAnalytics

Youwilllearnonenewstrategyeachmonth.Larryandhisresearchteamwillcoverthebackground, simulatedhistoricalresults,quantifiedperformancemetrics,andimplementationrulesforevery strategy.

EverystrategywillbedistributedexclusivelytoClubMembersonly.Thesestrategieswillnotbe madeavailabletothegeneralpublicfor12months.Wedothistoensurethatyourcompetitiveedge asaclubmemberisprotectedtothebestofourability.

Thestrategiesandresearchwillbebrandnew,basedonunpublishedresearch. Everystrategywillincludefulldisclosureonthebacktested,simulatedhistoricalresultsderived fromyearsoftradingdata.

Theinternetisfilledwithpeopletoutingpersonalopinions.Thereisverylittlecredible researchavailabletoindividualtraders,andthegoaloftheTradingMarketsAlphaClubistoprovide thisforyou.

Ourresearch&strategieshavestoodthetestoftime.TradingMarketshasbeeninbusinesssince January1999,andourCEOLarryConnorshasbeenpublishinghighqualityprofessionaltrading researchandstrategiessince1995.

IfyouwouldlikemoreinformationonTheAlphaClubclickhere.Ifyouwouldliketoorderyoucanhave immediateaccesstoitpleaseclickhereorcalltollfree8884848220ext.1(outsidetheUSpleasedial 9734947311ext.1).

WehavedevelopedConnorsRSIaddonmodulesforthefollowing tradingsoftwareplatformssothatyoucanapplytheConnorsRSI oscillatoraccordingtoyourownneeds: TradeStation AmiBroker thinkorswim Andmorearebeingaddedeveryday! Clickheretodownloadyouraddonmoduletoday!

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