What are the Larry Connors R2 rules?

S&P 500 above its 200-day average; 2-period RSI below 65 on day 1 and lower closes on days 2 and 3; buy at the day-3 close; sell when the 2-period RSI closes above 75.

Larry Connors

Trading researcher and author; co-author of “Street Smarts” with Linda Raschke and of “Short Term Trading Strategies That Work”

AA — the trader’s own published text (rule document, own site) was read.

Short-term mean reversion with a trend filter (RSI of 2 periods). A 2007 article with the full rule set of his “Improved R2” strategy for the S&P 500, stated as six rules. It is simulated, with no costs, and it is a sales piece for his products.

A published rule is a hypothesis, not evidence of profit. We do not know how often these rules won, and traders who publish their methods are the ones who survived.

Sources

The Improved R2 Strategy: 84% Correct with Just 6 Rules (TradingMarkets), 21 Feb 2007 — own site, 2007

Rules

Filter

FilterTrend filter: the S&P 500 is above its 200-day simple moving average (SPY or E-mini futures work as proxies).
[1]
FilterWhy 2 periods: he writes there is “little statistical evidence” for the standard 14-period RSI, and that the shorter period measures the short-term overbought/oversold state better.
[1]

Entry

EntryDay 1: the 2-period RSI is below 65 (neutral to possibly oversold). Day 2: the 2-period RSI closes lower than on day 1. Day 3: it closes lower than on day 2.
[1]
EntryBuy at the close of day 3.
[1]

Exit

ExitSell when the 2-period RSI closes above 75.
[1]

Discipline

DisciplineHe reports a simulation from 1995 to 2006: 102 trades, 84.31% “correct”, 1,013.9 S&P points gained, an average holding period of 5.76 days.
[1]

Not confirmed

Often attributed to this trader, but not found in the sources above. Not listed as his or her rules.

The widely quoted version “RSI(2) below 5 or 10 above the 200-day average, exit above 70 or above the 5-day average” comes from other interviews and books and is not in this article.

Limits of these rules

“Percent correct” is not defined as a win rate, there are no costs, drawdowns or position sizes, the three trade examples are hand-picked, and the article promotes the author’s courses. Mean reversion with no stop can carry large single losses.

Other traders

Rules are our paraphrase of the sources; only short quotes are verbatim. This is information, not advice or a promise of profit.