How to Trade ETFs with ConnorsRSI

  • April 4, 2013
  • Larry Connors

Exchange Traded Products (ETFs) are amongst the most popular trading vehicles for traders. One of the best performing trading strategies for trading ETFs is “scaling into” an ETF.

What does scaling in mean?

It means that instead of buying an entire position, especially when it’s oversold, a trader buys a smaller piece to start. If prices go higher he or she is happy. If prices go lower, it gives the trader the opportunity to buy more at lower prices.

Because ETFs have a short-term tendency to revert to their mean (meaning they tend to move from overbought to oversold and vice versa), they are amongst the best swing trading instruments to apply scale-in trading to.

In our Strategy Guidebook “ETF Scale-In Trading” we show how well this strategy works.

Here is one possible way to scale into an ETF.

We looked at all liquid, non-leveraged, equity ETFs since January 1, 2006. The rules are as follows:

    1. Buy 10% of a full position if the ETF has a closing ConnorsRSI reading under 10 for two consecutive days. This means if you would normally place $10,000 into a position, buy $1000 worth.
    2. If prices close lower anytime you’re in the position, buy another 20% ($2000).
    3. If prices close even lower anytime you’re in the position, buy another 30% ($3000).
    4. If prices close even lower than your previous purchase price, buy another 40% ($4000). This is the time when the ETF is extremely oversold and has historically seen higher prices over the short-term.
    5. You exit your position anytime it has a closing ConnorsRSI reading of 60.

How well has this done? Since 2006, in looking at all liquid, non-leveraged, equity ETFs this strategy set-up has occurred 873 times. Prices have closed higher than the average entry price 93.9%% of the time. As these test results show, scaling into ETFs has historically been a high probability way to trade ETFs. And there are literally many dozens of variations like this which have been correct over 90% of the time (some over 95% of the time).

Professional swing traders looking for high probability set-ups like to scale into their position. From these test results you can see why.

If you would like to learn more on how to scale into ETFs, you can do so by clicking here.