The idea
Most RSI strategies use 14 periods. Larry Connors popularised a far shorter one: a 2-period RSI, which swings to extremes after only two or three down days. The strategy buys those extremes, but only when the market is above its 200-day average, so it is buying dips in an uptrend rather than catching falling knives.
The exit is just as mechanical: sell at the first close above the 5-day average. Trades last a few days and most of them win, but the wins are small.
Watch it play out
Step by step
The rules
Setup
- Daily chart. The close is above the 200-day simple moving average.
Entry
- Buy at the close when the 2-period RSI closes under 10 (stricter versions use 5).
Stop-loss
- The original rules use no stop. Many traders add one, for example 2 or 3 ATR under the entry, or a time stop after 10 days.
Target
- Sell at the close of the first day that closes above the 5-day simple moving average.
Filters that help
- Long only, and only in markets that have historically mean-reverted (broad indices more than single stocks).
- Some versions buy a second time if RSI(2) drops further.
Why it can work
Over a few days, broad stock indices have tended to bounce after sharp falls, as forced sellers finish and dip buyers step in. Over months they have tended to rise. The strategy stacks both tendencies: a short-term overreaction inside a long-term uptrend.
Worked example
An index ETF is well above its 200-day average. After three down days it closes at $113.60 and its RSI(2) reads 6: buy at the close.
Two days later it closes at $117.90, above its 5-day average of $116.40: sell at the close, about 3.8% above the entry. Had it kept falling instead, nothing in the original rules would have closed it.
When it works, when it fails
Works best
In steady bull markets with frequent shallow dips, which is when most of the published results were made.
Struggles
In crashes and bear markets that begin inside an uptrend: the RSI stays low, the price keeps falling and, with no stop, small losses become large ones. The high win rate can hide that tail.
Common mistakes
- Running it on single stocks or crypto without testing: some markets trend through oversold readings instead of bouncing.
- Trading without any stop because the original rules had none, then holding through a crash.
- Judging it by its win rate instead of its losses.
Variations
- Cumulative RSI
- Sum of the last two or three RSI(2) readings under a threshold, for fewer and deeper dips.
- Double seven
- Buy a close at a 7-day low above the 200-day average, sell a close at a 7-day high.
What the evidence says
Evidence: Tested, mixedPublic tests disagree, or the edge has faded over time.
Connors and Alvarez published the rules with strong historical results on US stocks up to the late 2000s, and many backtests since have reproduced high win rates.
Recent public backtests of the published logic on the S&P 500 over the last ten years show it trailing buy and hold by a wide margin, with a win rate around 70% but a much smaller total return. It reduced the time in the market, and with it most of the gains.
Questions
- Why a 2-period RSI instead of 14?
- Because a 2-period RSI reaches extreme readings after just two or three down days, which is the short-term overreaction the strategy wants to buy. A 14-period RSI rarely gets there.
- Does RSI(2) still work?
- Public backtests show it still wins most trades on US indices, but over the last decade it made far less than simply holding the index. Whether it suits you depends on what you want it for.
- Should I use a stop with RSI(2)?
- The original rules did not, which keeps the win rate high but leaves the account exposed to a crash. Adding a stop or a time exit lowers the win rate and caps the worst case.