TPS Trading Strategy: Backtest And Example

Many traders often think that mean-reversion strategies are only meant for range-bound markets. But that’s not the case, as there are strategies that can be traded in a trending market. A good example is the TPS trading strategy. What is it?

The TPS (Trend, Pullback, and Signal) trading strategy, also known as the Time/Price Scale-in strategy or the 2-period RSI strategy, is a strategy developed by Larry Connors, a well-known trader and author. It is a mean-reversion strategy that is designed to take advantage of the momentum in the market by entering trades on pullbacks in the direction of the trend.

In this post, we answer some questions about the TPS trading strategy and end the article with a backtest.

Introduction to TPS Trading Strategy

The TPS (Trend, Pullback, and Signal) trading strategy, also known as the Time/Price Scale-in strategy or the 2-period RSI strategy, is a strategy developed by Larry Connors, a well-known trader and author. The strategy is based on the idea of combining trend-following indicators with momentum indicators to identify entry and exit points in the market.

The trend is identified using the 200-period moving average, while the pullback is identified using the Connors RSI, a custom RSI indicator developed by Connors. The signal is generated using a 2-period RSI.

The strategy is designed to take advantage of the momentum in the market by entering trades on pullbacks in the direction of the trend. The idea is that the pullback will provide an opportunity to enter a trade at a better price and with a higher probability of success. The strategy is used for short-term trading on various markets such as stocks, ETFs, and futures.

Benefits of TPS Trading Strategy

• It takes advantage of momentum in the market by entering trades on pullbacks in the direction of the trend.
• It uses trend-following indicators and momentum indicators to identify entry and exit points, increasing the probability of success.
• It provides a way to scale in a position by adding to the position gradually over time, reducing risk.
• It is suitable for short-term trading on various markets such as stocks, ETFs, and futures.
• It is flexible and can be customized to suit the individual trader’s risk tolerance and trading style.
• It provides a clear set of rules to follow, making it easy to implement and follow.
• It emphasizes the importance of proper risk management and not over-committing on any single trade.

Important Considerations for TPS Trading

Some of the important factors to consider when using the TPS trading strategy include:

• The direction of the trend
• What defines an overbought/oversold region in 2-period RSI
• The position size to trade
• How to scale in
• The exit signals

Steps to Implement TPS Trading Strategy

Here are the steps for implementing the TPS trading strategy:

1. Identify the trend: The stock must be trading above the 200-day Exponential Moving Average (EMA) to confirm that the trend is up.
2. Wait for an oversold signal: The 2-period Relative Strength Index (RSI) must be below 25 for two consecutive days, indicating that the stock is oversold.
3. Enter a trade: On the second day of the oversold signal, buy 10% of your position at the closing price.
4. Scale in on pullbacks: If the stock price closes lower than your previous entry price on the third, fourth, and fifth days, add 20%, 30%, and 40% more of your position, respectively.
5. Exit the trade: When the 2-period RSI reaches overbought territory (above 70), exit the trade at the closing price of that day.

Risk Management for TPS Trading

To manage risk when using the TPS strategy, do these:

• Use a trailing stop-loss to exit the trade.
• Use proper position sizing to not over-commit on any single trade.
• Scale in a position gradually over time to reduce risk.
• Use other indicators and market analysis to make better trade decisions.
• Have a clear risk management plan in place and stick to it.
• Keep track of your trades and performance to evaluate the effectiveness of your risk management plan.
• Be aware of the market conditions and adjust your strategy accordingly.

Different Types of TPS Trading Strategies

I am not aware of multiple TPS trading strategies. The TPS strategy I’ve mentioned is the one developed by Larry Connors which is based on combining trend-following indicators with momentum indicators to identify entry and exit points in the market.

Tools and Resources for TPS Trading

• 200-period moving average to identify the trend
• 2-period RSI to identify pullbacks and generate trade signals.
• Charting software to analyze asset prices
• Historical data to backtest the strategy
• Trading platform to execute trades
• Risk management tools

Common Mistakes to Avoid in TPS Trading

• Not following the set of rules and over-committing on a single trade
• Not having a proper risk management plan in place
• Not testing the strategy on historical data before implementing it in real-world trading
• Not adapting the strategy to suit your individual risk tolerance and market conditions
• Not having discipline and consistency in following the strategy
• Not regularly reviewing performance and making necessary adjustments

Strategies for Optimizing TPS Trading

• Backtesting the strategy on historical data to evaluate its performance
• Adjusting the strategy to suit individual risk tolerance and market conditions
• Incorporating other indicators and market analysis to make better trade decisions
• Sticking to a proper risk management plan
• Regularly reviewing performance and making necessary adjustments

Integrating TPS Trading with Other Strategies

You can integrate TPS with other strategies by using the TPS strategy for short-term trades and combine it with other strategies for long-term trades use TPS as a filter for other strategies, only taking trades that align with the TPS strategy.

How to Identify Profitable TPS Trading Opportunities

To identify profitable TPS trading opportunities, you can:

• use trend-following indicators like moving averages and Connors RSI to identify trends and pullbacks
• use momentum indicators like 2-period RSI and Bollinger bands to generate trade signals
• use other indicators and market analysis for better decision making

Strategies for Choosing the Right TPS Trading Platform

To choose the right TPS trading platform, you can:

• research and compare different platforms to find one that meets their needs
• look for platforms that offer historical data and backtesting capabilities
• check if the platform provides all the necessary tools and resources for TPS trading
• look for platforms that offer good customer support and educational resources
• look for a platform that is accessible from different devices and has a mobile app
• consider the fees and commissions of the platform
• test the platform’s user interface and navigation before committing to it

Understanding the Tax Implications of TPS Trading

The tax implications of TPS trading vary depending on the trader’s location and the type of assets traded. However, generally speaking, short-term trades (holds of less than a year) are taxed as ordinary income, while long-term trades (holds of more than a year) are taxed at a lower capital gains rate. Some countries have tax exemptions or deductions for capital losses.

Strategies for Minimizing Trading Costs

To minimize trading costs when using the TPS strategy, you can:

• Look for a brokerage with low commission fees and other trading costs
• Use limit orders to enter trades, which can save on costs compared to market orders
• Look for a brokerage that offers volume discounts or cash rebates for high-volume traders

Developing a TPS Trading Performance Plan

You can follow these steps:

• Define clear and specific goals for the trading performance
• Set a timeframe for achieving those goals
• Track and record all trades, including entry and exit points, position size, and the reasons for taking the trade
• Regularly review performance and compare it to the goals set
• Analyze the performance using metrics such as win rate, profit factor, and maximum drawdown
• Make necessary adjustments to the trading plan based on performance analysis

FAQ:

How does the TPS strategy work?

The TPS (Trend, Pullback, and Signal) trading strategy is a mean-reversion strategy developed by Larry Connors, designed to capitalize on market momentum by entering trades on pullbacks in the direction of the trend. The strategy combines trend-following indicators like the 200-period moving average with momentum indicators such as the Connors RSI and a 2-period RSI to identify entry and exit points in the market.

What are the important considerations for TPS trading?

Considerations include the direction of the trend, defining overbought/oversold regions in the 2-period RSI, determining position size, scaling into trades, and identifying exit signals. Traders need to identify the trend using the 200-day EMA, waiting for an oversold signal in the 2-period RSI, entering a trade, scaling in on pullbacks, and exiting when the 2-period RSI reaches overbought territory.

What are common mistakes to avoid in TPS trading?

Mistakes include not following the set rules, over-committing on a single trade, not having a proper risk management plan, not testing the strategy on historical data, lacking discipline, and not regularly reviewing performance.