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The Larry Connors R3 strategy
The R3 trading strategy was designed by the well-known trader Larry Connors. The strategy first appeared in his book “High Probability ETF Trading”. Although Connors created this strategy with a very high hit rate for ETFs, the general principles can be applied to other financial instruments
Larry Connors’ main objective was to design a strategy with many more winning trades than losing trades. You can read in the backtest section below if he succeeded.
|Suitable for||: All instruments|
|Instruments||: Futures and CFD-Forex|
|Trading type||: Swing trading|
|Trading tempo||: Variable|
|Using NanoTrader Full||: Manual or (semi-)automatic|
Based on his research and experience, Larry Connors has become a big fan of the 2-period RSI indicator. The R3 strategy is a mean reversion strategy, which primarily uses the 2-period RSI. The general idea is to find a good entry point after a mean reversion and when the 2-period RSI enters the extreme overbought (oversold) territory while the overall trend direction remains intact.
When to open a position?
Trader Larry Connors uses four criteria for a trading signal to occur. Three of these criteria include the RSI, hence the name R3.
A buy trading signal occurs when:
- The market price is above the 200-day moving average.
- The 2-period RSI drops three days in a row.
- On the first day of the 3-day drop the RSI value is already below 60.
- The 2-period RSI of the current day closes below 10.
A short sell trading signal occurs when:
- The market price is below the 200-day moving average.
- The 2-period RSI goes up three days in a row.
- On the first day of the 3-day rise the RSI value is already above 40.
- The 2-period RSI of the current day closes above 90.
This example shows two buy signals on Microsoft stock. The market price is above the blue line, which represents the 200-day moving average in the chart. The RSI was below 60 when it started dropping for three consecutive days. After the RSI dropped below 10, a buy signal was triggered.
When to close a position?
The R3 strategy does not use a profit target and stop loss.
- A long position is closed when the 2-period RSI closes above 70.
- A short sell position is closed when the 2-period RSI closes below 30.
This example shows a buy signal on Visa stock. The position was automatically closed 2 days later, when the RSI closed above 70.
Backtests give a very good impression of the R3 strategy. In particular Larry Connors’ claim that the strategy has a high number of winning trades seems to be correct.
This example shows a backtest on Visa stock over a period of five years. A total of 12 signals (9 winners and 3 losers) occurred. The total profit was 23,4%. The best winning trade made +4,6%. The worst losing trade lost -0,25%.
This example shows a backtest on NVIDIA stock over a period of five years. A total of 17 signals (12 winners and 5 losers) occurred. The total profit was 25,5%. The best winning trade made +9,6%. The worst losing trade lost -9,2%.
This example shows a backtest on the S&P 500 index over a period of five years. A total of 11 signals (9 winners and 2 losers) occurred. The total profit was 4,1%. The best winning trade made +2,4%. The worst losing trade lost -5,3%.
Using the NanoTrader Full follow these steps:
- Open a chart of the instrument you want to trade.
- Select the template study "WHS R3” in the "WHS Strategies" folder.
- To trade semi-automatically, activate TradeGuard+AutoOrder in the chart. To trade automatically, activate AutoOrder in the chart.