Today we test Larry Connors‘ R3 strategy and we continue backtesting the trading strategies Larry Connors and his team published in 2009 in a book called High Probability ETF Trading. All the strategies were tested on a basket of 20 liquid ETFs. The previous articles can be found on our page containing many different quantified trading strategies:
12 years have passed since the book was published and it could be interesting to know if Larry Connors’ trading strategies are still performing well.
Today we look at Larry Connors RSI trading strategy in chapter 4: The R3 Strategy (Larry Connors RSI 2):
The trading rules of R3
The trading rules are pretty simple:
These are all the rules to Connors RSI strategy, and the formula is pretty simple. Connors added an aggressive version as well: Whenever the position closes below your entry point, add a second unit. We will not test the aggressive version in this article.
The code in Amibroker:
If you like to know the code of Connors’ strategy plus the code for all the other free strategies on this website, click here (Connors have also used Amibroker extensively):
For more on why we use Amibroker, you might want to read this article:
The results of R3:
We tested the strategy on the data used by Connors. Unfortunately, we didn’t manage to replicate the results 100%: we got fewer fills. Both Connors and we tested on dividend-adjusted data sets, so we are not sure why our results differ slightly.
Anyway, the table below summarizes both Connors’ and our results. Our results cover the whole period the ETF has been listed (since inception) until December 2020 (no commissions and slippage included):
|Result by Connors||The average gain since||Profit|
|The average gain in %||inception to Nov.2020||factor||Difference:|
About 50% of the strategies performed worse in the last 12 years. The five ETFs at the bottom of the test were not part of Connors’ test, but we added them nevertheless (GDX, GDXJ, TLT, XLP, and XME).
The equity curve for the S&P 500 looks like this (SPY, compounded):
The win ratio for SPY is 90%, but there are only 79 trades since 1993.
For the Nasdaq (QQQ) it looks like this:
How does the R3 perform as a portfolio on all ETFs?
One thing is to test a strategy on one ETF at a time, but more importantly, might be to test it as a portfolio on different ETFs.
Let’s simulate the results on all 25 ETFs from the year 2000 until December 2020. The buy and sell criteria are the same as above, but we include a maximum of five open positions at any time and a maximum of 20% of equity for each position. The equity curve looks like this:
The number of trades is 992, the win-ratio is 75%, the average gain per trade is 0.68%, and the profit factor is 2.08. The sovereign debt crisis in 2011 hit the portfolio hard, and the maximum drawdown was during August 2011: -16%. CAGR is 6.47%.
All in all, we would say the strategy performed well, and obviously, this strategy doesn’t fit all markets.
The R3 strategy on Nasdaq and the S&P 500 as a portfolio
Most traders are interested in how it performs on the Nasdaq and the S&P 500. Below is the equity curve with 50% of the equity allocated to each trade in QQQ or SPY (can hold 1 or 2 positions at any time):
The profit factor is high, 3,37, but the CAGR is a low 2.69%. The latter is a result of the low time spent in the market: 4.5%.
Larry Connors’ other trading strategies
We have backtested many other of Connors’ strategies:
- Larry Connors’ Double Seven trading strategy
- Larry Connors’ multiple days up and multiple days down trading system
- Larry Connors’ %b trading strategy (Bollinger Bands)
- Larry Connors’ RSI 25 & RSI 75 trading strategy
- Larry Connors’ 3-day high/low method trading system
The R3 strategy is still working, 12 years after its inception. This is a mean reversion strategy and works best on equity markets.
We believe the strategy can be improved with certain small changes.