Larry Connors’ RSI 25 & RSI 75 (It Still Works) | Trading Strategies Analysis

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:

• How RSI works
• Connors RSI
• Cutler’s RSI

Here you can find all our Larry Connors Trading Strategies.

The rules of RSI 25 & RSI 75:

Connors’ strategy is simple. Here are the rules:

1. The close must be above the 200-day moving average.
2. The 4-day RSI must be below 25.
3. Aggressive version: buy a second unit if the RSI goes lower – under 20.
4. 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 reversion 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:

If you like to know the code of Connors’ strategy plus the code for all the other free strategies on this website, click here:

For more on why we use Amibroker, you might want to read this article:

• Amibroker summary

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:
DIA	0.7		0.65	2.38		-0.05
EEM	1.47		0.96	2.11		-0.51
EFA	0.92		0.51	1.64		-0.41
EWH	1.55		0.67	1.36		-0.88
EWJ	1.25		0.67	1.57		-0.58
EWT	1.65		0.91	2.05		-0.74
EWZ	1.93		1.18	1.44		-0.75
FXI	1.19		0.38	1.26		-0.81
GLD	0.21		0.61	2.01		0.4
ILF	2.11		1.65	4.24		-0.46
IWM	0.92		0.59	1.42		-0.33
IYR	-0.03		0.41	1.5		0.44
QQQ	1.09		0.96	2.97		-0.13
SPY	1.23		1.04	3.68		-0.19
XHB	0.27		1.37	4.62		1.1
XLB	0.43		0.56	1.78		0.13
XLE	1.33		0.86	1.71		-0.47
XLF	0.66		0.6	1.47		-0.06
XLI	0.55		0.52	1.45		-0.03
XLV	0.51		0.61	2.15		0.1
ETFs not
included:
GDX			1.34	2.1
GDXJ			2.77	5.61
TLT			0.36	1.71
XLP			0.52	2.28
XME			1.09	1.82

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):

The profit factor of QQQ is high: 2.97. As a rule of thumb, the higher the profit factor, the smoother the equity curve.

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.

CAGR is 8.5% since the year 2000, 1348 trades, max drawdown is 16.2%, and the profit factor is 1.76.

Larry Connors’ other trading strategies

Here you can find all our Larry Connors Trading Strategies.

RSI 25 & RSI 70 strategy – conclusion:

Larry Connors’ RSI 25 & RSI 70 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.

FAQ:

What is Larry Connors’ RSI 25 & RSI 75 strategy, and how does it work?

Larry Connors’ RSI 25 & RSI 75 strategy is a mean-reversion strategy described in Chapter 2 of the book “High Probability ETF Trading.” The rules involve conditions like the close being above the 200-day moving average, the 4-day RSI being below 25, and entering or adding a second unit if the RSI drops below 20. Exit occurs when the 4-day RSI turns above 55.

What is the significance of the RSI (Relative Strength Index) in Connors’ strategy?

The RSI is a momentum oscillator that measures the speed and change of price movements. In the RSI 25 & RSI 75 strategy, it helps identify oversold conditions for potential mean-reversion trading opportunities.

How did Connors test and present the results of the RSI 25 & RSI 75 strategy?

Connors tested the strategy on various ETFs, and the table in the content summarizes the original results up until December 2008. The backtesting was done using Amibroker, and results were presented for each ETF separately.