Larry Connors’ RSI 25 & RSI 75 Strategy: Still Working?

Just dove into an analysis of Larry Connors' RSI 25 & RSI 75 strategy, originally featured in his 2009 book, High Probability ETF Trading. This is a short-term, mean-reversion strategy designed for ETFs like QQQ and SPY.

Here's a quick rundown of the rules:

• Enter long when: The price is above its 200-day moving average, and the 4-day RSI falls below 25.

• Aggressive variant: Buy a second unit if the RSI dips below 20.

• Exit when: The 4-day RSI rises above 55 (this exit point is favored in the analysis over Connors' original 75 due to smaller drawdowns).

The analysis confirms that the strategy is still working, though it appears "slightly less effective" now compared to before 2009. Notably, it has shown resilience during periods of market panic, such as the GFC in 2008/09, the sovereign debt crisis in 2011, and COVID-19 in 2020.

Key performance highlights:

• The strategy boasts a 76% win ratio, with the aggressive version reaching 82%. However, typical for mean-reversion, average losers can be larger than average winners.

• When simulated as a portfolio with 5 positions (compounded results), it achieved an 8.5% Compound Annual Growth Rate (CAGR) since 2000, with a max drawdown of 16.2% and a profit factor of 1.76 over 1348 trades. Keep in mind that the strategy spends most of the time on the sidelines.

• For QQQ (Nasdaq), the strategy shows a high profit factor of 2.5, with an average gain per trade of 0.9% over 148 trades.