RSI 2-Period Strategy: Larry Connors Mean Reversion
The standard 14-period RSI is a staple of technical analysis. But Larry Connors discovered that a much shorter RSI — just 2 periods — produces remarkably effective mean reversion signals. This is one of the simplest and most tested short-term strategies in trading.
The Strategy
Connors' RSI-2 strategy is straightforward:
- Buy when RSI(2) drops below 10 (extremely oversold)
- Sell when RSI(2) rises above 90 (extremely overbought)
- Exit when RSI(2) crosses back above 70 (for longs) or below 30 (for shorts)
The idea: a 2-period RSI measures only the last 2 candles. When it drops below 10, price has fallen sharply and very quickly — this is a short-term extreme that typically snaps back within 1-3 bars.
The Critical Filter: 200 SMA
The RSI-2 strategy only works in the direction of the longer-term trend. Connors added a 200-period SMA as a trend filter:
- Only buy (RSI below 10) when price is ABOVE the 200 SMA — we are in a long-term uptrend, and the dip is a buying opportunity
- Only sell (RSI above 90) when price is BELOW the 200 SMA — we are in a long-term downtrend, and the rally is a selling opportunity
Without this filter, the strategy loses money. Counter-trend mean reversion against a strong trend is a recipe for disaster — the RSI can stay extreme for extended periods while price keeps trending.
Timeframe and Instruments
Connors originally designed this for daily charts on US stocks. The strategy works best on:
- Daily charts — the signal is most reliable here. 1H and 15m charts produce too much noise.
- Index CFDs — S&P 500, DAX 40, FTSE 100. Indices mean-revert well because they represent broad markets, not individual stocks.
- Major forex pairs — EUR/USD, GBP/USD. These range frequently, which is ideal for mean reversion.
- Gold (XAU/USD) — tends to snap back after sharp 1-2 day drops.
Avoid using RSI-2 on commodities like oil or exotic forex pairs — these can trend for extended periods without mean-reverting.
Backtested Results
Connors tested this strategy on the S&P 500 from 1995-2007 and reported a 75-80% win rate. Independent backtests on forex and indices have confirmed win rates of 65-75% — still excellent for a simple rule-based strategy.
However, the average win is small (1-3%) while the average loss can be larger (3-5%) if the market does not mean-revert. The strategy relies on a high win rate, not a high reward-to-risk ratio. Expectancy is positive but modest: approximately 0.3-0.5R per trade.
Variations and Enhancements
Several variations improve the strategy:
- RSI(2) below 5 instead of 10 — fewer signals but higher win rate (~80%)
- Multiple entries: If RSI(2) stays below 10 for 3+ days, add to the position. The longer the extreme, the bigger the snap-back.
- Exit on RSI(2) > 50 instead of 70 — takes profit earlier, locks in gains, but may leave money on the table.
- Add a second filter: Only trade when the 5-period SMA is also above the 200-period SMA (short-term and long-term trend alignment).
Risk Management
Even with a 75% win rate, risk management is essential:
- Risk 1% per trade — the 25% of trades that lose can cluster during trending periods
- Maximum 2 RSI-2 trades open at once — they are often correlated
- Stop loss: below the recent swing low (for longs) — not a fixed pip distance
- If the market is in a strong trend (ADX > 30), skip RSI-2 signals — mean reversion fails in strong trends
Disclaimer: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 70-80% of retail investor accounts lose money when trading CFDs. Backtesting does not guarantee future results. Always consider whether you can afford the potential loss of your capital.