How to Trade Pullbacks – Part 2: The ConnorsRSI Indicator

Matt Radtke is Senior Researcher for Connors Research. Mr. Radtke graduated magna cum laude from Michigan State University with a degree in computer science. He has 25 years of software development experience in companies large and small, including Hewlett-Packard and Bell Northern Research.

Mr. Radtke has been actively trading stocks, ETFs, and options since 2008. Over the past several years he has become increasingly involved with the Connors Group family of companies, first as a student, then as a member of Chairman’s Club, and finally as a consultant, researcher, and author.

Larry Connors and Connors Research have been developing, testing, and publishing quantified trading strategies since the mid-1990s. During that time, we have had the opportunity to evaluate a great number of different technical indicators and to assess their effectiveness in predicting future price action. Now we’ve taken the next step and created an indicator of our own: ConnorsRSI. Our research has shown ConnorsRSI to be superior to any other momentum indicator that we’ve tested.

Click here to gain instant access to our latest free strategy guidebook: An Introduction to ConnorsRSI. Inside you’ll find a fully-quantified pullback strategy based around the ConnorsRSI indicator.

ConnorsRSI is a composite indicator consisting of three components. Two of the three components utilize the Relative Strength Index (RSI) calculations developed by Welles Wilder in the 1970’s, and the third component ranks the most recent price change on a scale of 0 to 100. Taken together, these three factors form a momentum oscillator, i.e. an indicator that fluctuates between 0 and 100 to indicate the level to which a security is overbought (high values) or oversold (low values). A complete description of the calculations behind the ConnorsRSI indicator can be found here.

For stocks, a good rule of thumb is that the stock is becoming oversold when its ConnorsRSI value falls below 15. A stock with a ConnorsRSI value of less than 10 is very oversold, and a value of less than 5 indicates an extremely oversold condition. Generally, the stocks with the lowest ConnorsRSI values, i.e. the deepest pullbacks, are the ones that will experience the greatest rebounds when their prices revert to the mean.

To see how ConnorsRSI values compare to and complement other common indicators, visit the Trading Markets Screener. Real-time values for ConnorsRSI can be found on the Symbol Details Page of the Trading Markets Analytics site.

In Part 3, we’ll quantify a complete set of entry rules for a Pullback strategy based on ConnorsRSI.

Click here to read How to Trade Pullbacks – Part 1

Click here to read How to Trade Pullbacks – Part 3

Click here to read How to Trade Pullbacks – Part 4

Click here to read How to Trade Pullbacks – Part 5