Last Updated on December 15, 2020 by Oddmund Groette
High Probability ETF Trading, published in 2009 and written by Larry Connors and Cesar Alvarez, contains some interesting strategies. They are all mean revertive and tested on the most popular ETFs at the time of writing, which was the end of 2008, in the middle of the GFC.
Do the strategies covered in the book still work?
Today we look at the strategy described in chapter two: RSI 25 & RSI 75.
The strategy was first intended as a strategy for QQQ (Nasdaq) and SPY (S&P 500), but it works on a wide range of ETFs. In order to understand the strategy you need to know what the RSI is:
The rules of RSI 25 & RSI 75:
Connors’ strategy is simple. Here are the rules:
- The close must be above the 200-day average.
- The 4-day RSI must be below 25.
- Aggressive version: buy a second unit if the RSI goes lower – under 20.
- Exit when the 4-day RSI turns above 55.
This is all there is to it. If numbers 1 and 2 are true, then enter at the close. If you have a position and number 4 is true, then exit at the close. The execution might be a problem because you only know the closing price after the fact. One solution for live trading is to send orders just some seconds before the close.
The strategy had a win ratio of 76%, while the aggressive version, which we don’t test, had a win-ratio of 82%. But as with all mean-revertive strategies the average loser is a bit higher than the average winner.
Why Connors called the Strategy RSI 25 & RSI 75 is a bit of a mystery. Presumably, it was originally meant to be an exit when the RSI(4) hit 75, but this exit makes the drawdown much bigger.
The code in Amibroker:
In Amibroker the code is like this:
Buy= RSI(4)<25 AND C>MA(C,200);
For more on why we use Amibroker, you might want to read this article:
The results of RSI 25 & RSI 75:
The table below summarizes Connors’ original result up until December 2008 (left column) and our result reveals the performance from inception until December 2020:
|Result by Connors||Average gain since||Profit|
|Average gain in %||inception to Nov.2020||factor||Difference:|
Only 5 of the ETFs improved the results after the initial period tested by Connors. The five ETFs on the bottom (GDX, GDXJ, TLT, XLP and XME) were not included in Connors’ test. Please be aware that commissions, slippage, and taxes are not included in the backtest.
Most readers are probably interested in how it performs on SPY and QQQ. The table indicates the results are pretty good, but how does the equity curves look like?
This is the equity curve of QQQ (Nasdaq):
For S&P 500 (SPY) the equity curve looks like this:
The RSI 25 & RSI 75 strategy as a portfolio:
Connors and his team only tested the strategy on each separate ETF. Perhaps more interesting is to test how the strategy performs if you simulate the results as a portfolio.
The equity curve below is simulating 5 positions. This means one position is 20% of the equity at entry, and the results are compounded.
Connors’ strategy is still working, but it seems to be slightly less effective now than before 2009. It holds up pretty well during periods with panics, like the GFC in 2008/09, the sovereign debt crisis in 2011, and the Covid-19 in 2020.
The strategy can easily be improved, something we will cover later.
If you like this article, you might like other articles about trading strategies:
Disclosure: We are not financial advisors. Please do your own due diligence and investment research or consult a financial professional. All articles are our opinion – they are not suggestions to buy or sell any securities.