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ConnorsResearchTradingStrategySeries

AnIntroductionto
ConnorsRSI
By
ConnorsResearch,LLC
LaurenceConnors
CesarAlvarez
MattRadtke

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Copyright 2012, Connors Research, LLC.


ALL RIGHTS RESERVED. No part of this publication may be reproduced, stored in a
retrieval system, or transmitted, in any form or by any means, electronic, mechanical,
photocopying, recording, or otherwise, without the prior written permission of the
publisher and the author.
This publication is designed to provide accurate and authoritative information in regard
to the subject matter covered. It is sold with the understanding that the author and the
publisher are not engaged in rendering legal, accounting, or other professional service.
Authorization to photocopy items for internal or personal use, or in the internal or
personal use of specific clients, is granted by Connors Research, LLC, provided that the
U.S. $7.00 per page fee is paid directly to Connors Research, LLC, 1-973-494-7333.
ISBN 978-0-9853072-9-5
Printed in the United States of America.

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Disclaimer
By distributing this publication, Connors Research, LLC, Laurence A. Connors, Cesar Alvarez, and Matt
Radtke (collectively referred to as Company") are neither providing investment advisory services nor
acting as registered investment advisors or broker-dealers; they also do not purport to tell or suggest
which securities or currencies customers should buy or sell for themselves. The analysts and employees
or affiliates of Company may hold positions in the stocks, currencies or industries discussed here. You
understand and acknowledge that there is a very high degree of risk involved in trading securities and/or
currencies. The Company, the authors, the publisher, and all affiliates of Company assume no
responsibility or liability for your trading and investment results. Factual statements on the Company's
website, or in its publications, are made as of the date stated and are subject to change without notice.
It should not be assumed that the methods, techniques, or indicators presented in these products will be
profitable or that they will not result in losses. Past results of any individual trader or trading system
published by Company are not indicative of future returns by that trader or system, and are not indicative
of future returns which be realized by you. In addition, the indicators, strategies, columns, articles and all
other features of Company's products (collectively, the "Information") are provided for informational and
educational purposes only and should not be construed as investment advice. Examples presented on
Company's website are for educational purposes only. Such set-ups are not solicitations of any order to
buy or sell. Accordingly, you should not rely solely on the Information in making any investment. Rather,
you should use the Information only as a starting point for doing additional independent research in order
to allow you to form your own opinion regarding investments.
You should always check with your licensed financial advisor and tax advisor to determine the suitability
of any investment.
HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN INHERENT
LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT
REPRESENT ACTUAL TRADING AND MAY NOT BE IMPACTED BY BROKERAGE AND OTHER
SLIPPAGE FEES. ALSO, SINCE THE TRADES HAVE NOT ACTUALLY BEEN EXECUTED, THE
RESULTS MAY HAVE UNDER- OR OVER-COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN
MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING PROGRAMS IN
GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEYARE DESIGNEDWITH THE BENEFIT OF
HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO
ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN.
Connors Research
10 Exchange Place
Suite 1800
Jersey City, NJ 07302

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Table of Contents
Section1TheConnorsRSIIndicator.........................................................5
Section2ConnorsRSIBasePerformance...............................................10
Section3ConnorsRSIPullbackStrategyRules.......................................14
Section4TheRoleofExits.....................................................................21
Section5TestResults............................................................................24
Section6TradingOptionsUsingtheConnorsRSIPullbackStrategy......30
Section7AdditionalThoughts...............................................................34

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Section1

TheConnorsRSI
Indicator

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ConnorsResearchhasbeendeveloping,testing,andpublishingquantifiedtradingstrategiessincethe
mid1990s.Duringthattime,wehavehadtheopportunitytoevaluateagreatnumberofdifferent
technicalindicatorsandtoassesstheireffectivenessinpredictingfuturepriceaction.Nowwevetaken
thenextstepandcreatedanindicatorofourown:ConnorsRSI.Thepurposeofthisguidebookisto
describetheindicatoritselfandalsotoprovideawelldefined,quantifiedtradingstrategythatutilizes
thisnewindicator.
ConnorsRSIisacompositeindicatorconsistingofthreecomponents.Twoofthethreecomponents
utilizetheRelativeStrengthIndex(RSI)calculationsdevelopedbyWellesWilderinthe1970s,andthe
thirdcomponentranksthemostrecentpricechangeonascaleof0to100.Takentogether,thesethree
factorsformamomentumoscillator,i.e.anindicatorthatfluctuatesbetween0and100toindicatethe
leveltowhichasecurityisoverbought(highvalues)oroversold(lowvalues).
BeforewediscusshowtocalculateConnorsRSI,letsreviewWildersRSI.RSIisaveryusefuland
popularmomentumoscillatorthatcomparesthemagnitudeofastock'sgainstothemagnitudeofits
lossesoversomelookbackperiod.Wilderhimselfbelievedthat14periodswastheideallookback.We
oftenusetheshorthandnotationRSI(14)forthe14periodRSI.TheformulabelowcomputesRSI(14)for
aseriesofpricechanges:

IfwewantedtocomputeRSIforadifferentnumberofperiods(N),thenwewouldreplace14inthe
formulaabovewithN,andreplace13withN1.Regardlessofthenumberofperiodsusedinthe
calculation,theresultwillalwaysbeanumberbetween0and100.TraderswhouseRSI(14)typically
lookforvaluesgreaterthan70toidentifyoverboughtconditions,andvalueslessthan30toindicate
oversoldconditions.
OurpreviousresearchhasshownthatusingshorterlookbackperiodsmakesRSImoreeffectivein
predictingshorttermpricemovements.WehavepublishedmanystrategiesthatutilizeRSI(2),aswell
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asseveralthatuseRSI(3)andRSI(4).ChangingthenumberofperiodsalsohasaneffectontheRSIlevels
thatbestidentifyoverboughtandoversoldconditions.Forexample,anRSI(2)valueoflessthan10is
usuallyareliableindicatorofanoversoldcondition,whileanRSI(2)valueover90isagoodbenchmark
foranoverboughtcondition.
NowletsturnourattentionbacktoConnorsRSI.Asmentionedpreviously,ConnorsRSIcombinesthree
components,andasyoumightguess,theyareallelementsthatourresearchhasrepeatedlyshownto
havesignificantpredictiveability:
PriceMomentum:Aswejustdiscussed,RSIisanexcellentwaytomeasurepricemomentum,
i.e.overboughtandoversoldconditions.Bydefault,ConnorsRSIappliesa3periodRSI
calculationtothedailyclosingpricesofasecurity.WewillrefertothisvalueasRSI(Close,3).
DurationofUp/DownTrend:Whentheclosingpriceofasecurityislowertodaythanitwas
yesterday,wesaythatithascloseddown.Ifyesterdaysclosingpricewaslowerthanthe
previousdaysclose,thenwehaveastreakoftwodownclosedays.Ourresearchhasshown
thatthelongerthedurationofadownstreak,themorethestockpriceislikelytobouncewhen
itrevertstothemean.Likewise,longerdurationupstreaksresultinlargermovesdownwhen
thestockmeanreverts.Ineffect,thestreakdurationisanothertypeofoverbought/oversold
indicator.
Theproblemis,thenumberofdaysinastreakistheoreticallyunbounded,thoughwecould
probablyplacesomepracticallimitsonitbasedonpastexperience.Forexample,wemight
observethattherehavebeenveryfewinstancesofeitheranupstreakoradownstreaklasting
formorethan20days,butthatstilldoesntgetustoatypicaloscillatortypevaluethatvaries
between0and100.
Thesolutionistwofold.First,whenwecountthenumberofdaysinastreak,wewilluse
positivenumbersforanupstreak,andnegativenumbersforadownstreak.Aquickexample
willhelptoillustratethis:
Day
1
2
3
4
5
6
7
8

ClosingPrice
$20.00
$20.50
$20.75
$19.75
$19.50
$19.35
$19.35
$19.40

StreakDuration

1
2
1
2
3
0
1

TheclosingpriceonDay2ishigherthanonDay1,sowehaveaonedayupstreak.OnDay3,
thepricecloseshigheragain,sowehaveatwodayupstreak,i.e.theStreakDurationvalueis2.
OnDay4,theclosingpricefalls,givingusaonedaydownstreak.TheStreakDurationvalueis
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negative(1)becausethepricemovementisdown,notup.Thedownwardtrendcontinueson
Days5and6,whichourStreakDurationreflectswithvaluesof2and3.OnDay7theclosing
priceisunchanged,sotheStreakDurationissetto0indicatingneitheranupclosenoradown
close.Finally,onDay8theclosingpricerisesagain,bringingtheStreakDurationvaluebackto
1.
ThesecondaspectofthesolutionistoapplytheRSIcalculationtothesetofStreakDuration
values.Bydefault,ConnorsRSIusesa2periodRSIforthispartofthecalculation,whichwe
denoteasRSI(Streak,2).Theresultisthatthelongeranupstreakcontinues,thecloserthe
RSI(Streak,2)valuewillbeto100.Conversely,thelongerthatadownstreakcontinues,the
closertheRSI(Streak,2)valuewillbeto0.Thus,wenowhavetwocomponentsRSI(Close,3)
andRSI(Streak,2)thatbothusethesame0100scaletoprovideaperspectiveonthe
overbought/oversoldstatusofthesecuritywereevaluating.
RelativeMagnitudeofPriceChange:ThefinalcomponentofConnorsRSIlooksatthesizeof
todayspricechangeinrelationtopreviouspricechanges.WedothisbyusingaPercentRank
calculation,whichmayalsobereferredtoasapercentile.Basically,thePercentRankvalue
tellsusthepercentageofvaluesinthelookbackperiodthatarelessthanthecurrentvalue.
Forthiscalculation,wemeasurepricechangenotindollarsandcents,butasapercentageof
thepreviousdaysprice.Thispercentagegainorlossistypicallyreferredtoastheoneday
return.Soifyesterdaysclosingpricewas$80.00,andtodayspriceis$81.60,theoneday
returnis($81.60$80.00)/$80.00=0.02=2.0%.
TodeterminethePercentRank,weneedtoestablishalookbackperiod.ThePercentRank
valueisthenthenumberofvaluesinthelookbackperiodthatarelessthanthecurrentvalue,
dividedbythetotalnumberofvalues.Forexample,ifthelookbackperiodis20days,thenwe
wouldcomparetodays2.0%returntotheonedayreturnsfromeachoftheprevious20days.
Letsassumethatthreeofthosevaluesarelessthan2.0%.WewouldcalculatePercentRankas:
PercentRank=3/20=0.15=15%
ThedefaultPercentRanklookbackperiodusedforConnorsRSIis100,orPercentRank(100).We
arecomparingtodaysreturntotheprevious100returns,orabout5monthsofpricehistory.
Toreiterate,largepositivereturnswillhaveaPercentRankcloserto100.Largenegative
returnswillhaveaPercentRankcloserto0.
ThefinalConnorsRSIcalculationsimplydeterminestheaverageofthethreecomponentvalues.Thus,
usingthedefaultinputparameterswouldgiveustheequation:

ConnorsRSI(3,2,100)=[RSI(Close,3)+RSI(Streak,2)+PercentRank(100)]/3

Theresultisaveryrobustindicatorthatismoreeffectivethananyofthethreecomponentsused
individually.Infact,ConnorsRSIalsoofferssomeadvantagesoverusingallthreecomponentstogether.
Whenweusemultipleindicatorstogenerateanentryorexitsignal,wetypicallysetatargetvaluefor
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eachone.Thesignalwillonlybeconsideredvalidwhenalltheindicatorsexceedthetargetvalue.
However,byusinganaverageofthethreecomponentindicators,ConnorsRSIproducesablendingeffect
thatallowsastrongvaluefromoneindicatortocompensateforaslightlyweakervaluefromanother
component.Asimpleexamplewillhelptoclarifythis.
LetsassumethatTraderAandTraderBhaveagreedthateachofthefollowingindicatorvaluesidentify
anoversoldcondition:

RSI(Close,3)<15
RSI(Streak,2)<10
PercentRank(100)<20

TraderAdecidestotaketradesonlywhenallthreeconditionsaretrue.TraderBdecidestouse
ConnorsRSItogenerateherentrysignal,andusesavalueof(15+10+20)/3=15asthelimit.Now
assumewehaveastockthatdisplaysthefollowingvaluestoday:

RSI(Close,3)=10
RSI(Streak,2)=8
PercentRank(100)=21
ConnorsRSI=(10+8+21)/3=13

TraderAwillnottakethetrade,becauseoneoftheindicatorsdoesnotmeethisentrycriteria.
However,TraderBwilltakethistrade,becausethetwolowRSIvaluesmakeupfortheslightlyhigh
PercentRankvalue.Sinceallthreeindicatorsareattemptingtomeasurethesamething
(overbought/oversoldconditionofthestock)bydifferentmechanisms,itmakesintuitivesensetotake
thismajorityrulesapproach.Moreimportantly,ourresearchhasshownConnorsRSItobesuperiorto
anyothermomentumindicatorthatwevetested.

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ConnorsRSIBase
Performance
Section2

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Withanyindicatorthatyouuseinyourtrading,itishelpfultoknowhowtheindicatorbehaves,and
whatitstellingyouaboutthesecurityprice.OurgoalwithConnorsRSIwastodevelopasuperior
momentumoscillatorwhichwouldproducelowvaluesforoversoldstocksandETFs,andhighvalues
whenthosesecuritiesareinanoverboughtstate.
Todeterminewhetherwehadachievedourgoal,weranthefollowingtest.Wecreatedauniverseof
approximately6,000highlyliquidstocks.StartingonJanuary2,2001,welookedforeverystockinthe
universewhichhadthefollowingcharacteristicsonthatday:
1. Atleast200daysoftradingdataavailable
2. Averagedailyvolumeoverthepast21daysofatleast500,000sharesperday
Eachstockthatmetourcriteriawasplacedinoneoftwentydifferentbucketscorrespondingtoits
ConnorsRSIvalueatthecloseoftradingonthatday.StockswithConnorsRSI(3,2,100)valuesoflessthan
5wentintothe0bucket.ThosewithConnorsRSI(3,2,100)valuesgreaterthanorequalto5andless
than10wereplacedinthe5bucket,etc.allthewayuptothe95bucket,whichcontainedstockswith
ConnorsRSIvaluesof95to100.ThisprocesswasrepeatedforeverytradingdaythroughJuly31,2012.
Next,foreachofthe20bucketswecalculatedthefivedayreturnofeachstockforeverydayinthetest
period,andaveragedthosevaluesforeachofthe20buckets.Insimpleterms,wedeterminedthe
typical5daypricemove(asapercentage)ofastockwhoseConnorsRSIvaluefellintoaparticular
bucket.
Weexpectedthatstocksthatwereoversold(thosewithlowConnorsRSIvalues)wouldincreaseinprice,
whilethosethatwereoverboughtwoulddecreaseinprice.Asyoucanseeinthetablebelow,thisis
exactlywhathappened.

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ConnorsRSI(3,2,100)
Bucket
0
5
10
15
20
25
30
35
40
45
50
55
60
65
70
75
80
85
90
95

5DayReturn
2.28%
1.18%
0.56%
0.41%
0.31%
0.20%
0.23%
0.20%
0.14%
0.13%
0.28%
0.32%
0.21%
0.18%
0.08%
0.02%
0.04%
0.14%
0.46%
1.42%

YoucanseethatastheConnorsRSIvaluegoesbelow20,the5dayreturnsbegintoincrease
substantially.StockswithaConnorsRSIvalueintherangeof0to5(the0bucket)experiencedan
averagepriceincreaseof2.28%overthenextfivetradingdays.
WeseetheinversebehavioratthetopendoftheConnorsRSIrange:asthevaluemovesabove80,the
5dayreturnsareincreasinglynegative,withstocksinthe95bucketshowinga1.42%pricedecrease
overthefollowingfivedays.
Forthoseofyouwhoaremorevisuallyoriented,thechartbelowshowsthesameinformationasthe
tableabove:

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2.50%

5DayReturnofStockswitha
ConnorsRSI(3,2,100)ValueofX

2.00%

1.50%

1.00%

0.50%

0.00%
0

10

15

20

25

30

35

40

45

50

55

60

65

70

75

80

85

90

95

0.50%

1.00%

1.50%

2.00%

NowthatwevelookedatConnorsRSIinisolation,letsmoveontotheConnorsRSIPullbackStrategy
rulestoseehowtheindicatorperformsaspartofacompletesystem.

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ConnorsRSIPullback
StrategyRules
Section3

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Pullbacktradingisoneofthemostpopularformsoftradingamongsttraders.Thegoodnewsisthat
whenitsdonecorrectlyitcanbeverylucrative.Thenotsogoodnewsisthatoverthepasttwodecades
therehasbeenaproliferationofpublishedpullbackstrategieswhichhavelittleornoedgeatall.
InthisStrategyGuide,wewillpresentastrategywhichutilizesConnorsRSIincombinationwithother
indicatorstoidentifywhenapullbackhasoccurred.Eachoftheseindicatorsandtheircontributionto
thestrategywillbedescribedinthenextchapter.Multipleexittriggerswerealsotested,allowingyou
toselectavariationofthestrategythatcomplementsyouroveralltradingplan.
Beforewegoon,letslookatexactlywhatapullbackisandwhyitsimportant.
What Is A Pullback?
Apullbackoccurswhenasecuritywhosepricehasbeenmovinghighersellsoff,i.e.thepriceofthe
securitydrops.Mostpeopletradepullbacksbasedondailybars,althoughsometradersseekout
intradaypullbackswhileothersuselongertimeframes.Thecommonthemeisthattradersare
attemptingtoidentifystocksthattheyfeelhavepulledbacktoofarandwilllikelyregaintheirupward
trend.Thismovementbacktowardthelongertermtrendisknownasmeanreversion.
Therearenumerouswaystoidentifypullbacks,rangingfromsimplyeyeballingachartallthewayup
tousingindicatorssuchasFibonaccinumbers.Althoughthesetechniquesworkforsometraders,we
preferamoreprecise,quantifiedapproach.Withexactentryandexitrulesinplace,wewanttosee
robusttestresultsforthemajorityofthemanycombinationsofparametersthatweretesting,andfor
thoseresultstobeconsistentacrosstheentiretestingperiod(2001throughmid2012).Suchsolid
resultsindicatethatwearenotsimplycurvefittingorcherrypicking.
Whentradingshorttermpullbacks,thebestresultsoccurwhenyouholdthepositionforatleastafew
days.Oftenstockspullbacksharplyandsnapbackstrongly.Thereisnowayofknowingaheadoftime
howfarthatupwardmovewillbe,soitiscrucialtohavewelldefinedexitrulesinplacewhichallowfor
therallytoplayout.
NowletsmoveontotheConnorsRSIPullbackStrategyrules.Aswithallofourstrategies,inthis
guidebookwewillpresentyouwithquantifiedrulesforenteringandexitingtrades.Inaddition,wewill
showyouhowdifferentvariationsoftheruleshaveperformedovertime,sothatyoucanselectthe
variationsthatbestcomplementyourowntradingplan.

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HerearetheentryrulesfortheConnorsRSIPullbackStrategy:
1. Thestockpricemustbeabove$5pershare.
2. Thestocksaveragedailyvolumeoverthepast21days(onetradingmonth)mustbeatleast
250,000sharesperday.
3. Thestocks10dayAverageDirectionalIndex(ADX)isabove30.
4. TodaythestockslowestpriceisatleastW%(W=2,4,6,or8)belowthepreviousdays
close.
5. TodayscloseisinthebottomX%(X=10or25)ofthedaysrange.
6. TheConnorsRSI(3,2,100)valueofthestockisbelowY,whereY=5,6,715.
7. Iftheaboverulesaremettoday,buythestocktomorrowonafurtherintradaylimitZ%
belowtodaysclosingprice(Z=4,6,8,10).
8. ExitthepositionwhenthestockcloseswithaConnorsRSI(3,2,100)valueaboveN(N=50,60
70or80),exitingattheclosingprice.
Letslookateachruleinalittlemoredepth,andexplainwhyitsincludedinthestrategy.
Rule1helpsussteerclearofpennystocksandotherhighlyvolatile,unpredictablecompanies.Though
priceisneveraguarantee,wehavefoundthat$5/shareisagoodpricefloorforselectingmorestable
stocks.
Rule2assuresthatwereinhighlyliquidstockswhichcanbereadilyboughtandsold,withtightbid/ask
spreads.
Rule3confirmsthestrengthoftherecenttrend.ADXisnondirectional,soitwillquantifyatrend's
strengthregardlessofwhetheritisupordown.However,thenextthreeruleswillestablishthefact
thatthestockiscurrentlyinadowntrend.
Rule4identifiesabasicpullback:asignificantselloff,measuredasapercentageofthepreviousclosing
price.Sincethisruleusesthelowpriceforthedayratherthantheclosingprice,wedontyetknow
whattodaysoverallpriceactionlookslike,butwedoknowthatthestockfalteredinameaningfulway.
Rule5givesusmorevisibilityintotodayspriceaction.Closingrangeiscalculatedas:

ClosingRange=(CloseLow)/(HighLow)

Forexample,iftodaysLowpricewas$12.00,theHighpricewas$12.50,andtheClosingpricewas
$12.05,thentheclosingrangewouldbe:

ClosingRange=(12.0512.00)/(12.5012.00)=.05/.50=.10=10%

WhileRule4tellsusthatthestockstumbled,Rule5letsusknowthatitdidnotrecoversignificantly
beforetheendofthetradingday,whichinturnisagoodindicatorthatthepriceislikelytofallfurther
tomorrow.

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Rule6isthekeytodeterminingthequalityofthepullback.Ourresearchhasshownthatthelowerthe
ConnorsRSIvalueis,thelargerthebounceislikelytobewhenthestockrecovers.
Rule7allowsustoenterthetradeatanoptimalprice.Weretakinganalreadyoversoldstockas
measuredbyConnorsRSI(3,2,100),andthenwaitingforittobecomeevenmoreoversoldonanintraday
basis.Becausetheintradaypricedropisoccurringforasecondconsecutiveday,itsoftenaccompanied
byagreatdealoffear.Moneymanagersgetespeciallynervousandoftentelltheirheadtraderstojust
getmeoutaftertheyhavemadethedecisiontosell.Thispanichelpscreatetheopportunity.
Rule8providesawelldefinedexitmethod.Fewstrategieshavequantified,structured,anddisciplined
exitrules.Rule8givesyoutheexactparameterstoexitthetrade,backedbyoveradecadeofhistorical
testresults.
Letsseehowatypicaltradelooksonachart.Forthisexample,welluseavalueof4%fortheselloff
(W),25%fortheclosingrange(X),AConnorsRSI(Y)valueof10,andanentrylimit(Z)of8%.Wewillexit
whenConnorsRSIclosesabove70.

ChartcreatedinAmibroker.ReprintedcourtesyofAmiBroker.com.

Figure1:Setup,EntryandExitsignalsforMTL

Onthechartabove,thetoppaneshowsthepricebarsinblack,theverticalgraylinemarksthecurrently
selecteddaywhichisalsothesetupday,thegreenuparrowindicatestheentryday,andthereddown
arrowindicatestheexitday.Themiddlepanedisplaysthevolumeasverticalblackhistogrambars,and
showsthe21daymovingaverageofvolumeasagreenline.ThebottompaneshowsConnorsRSIasa
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redline,andADXasablueline.Nowwellconfirmthateachofourentryandexitconditionswas
correctlymet.
Rule1requiresthepriceofthestocktobeabove$5pershare.Forthedaysshownonthechart,wecan
seethatthepricehasrangedfromjustover$7.50/sharetojustunder$5.50/share,thusmeetingour
condition.
Rule2requiresthatthe21daymovingaverageofthevolumebegreaterthan250,000shares/day.The
averagevolumehasbeenbetween2and4millionshareslately,andonthesetupdayitwas2.9million,
sowevefarexceededthisrequirement.
Rule3statesthatADX(10)mustbeabove30.OnthesetupdaytheADX(10)valueis48.62.
Withourselectedinputparameters,Rule4tellsustolookforalowpricethatsatleast4%below
yesterdaysclose.On5/16/2012(thedaybeforethesetup),MTLclosedat$6.42.Therefore,todays
lowmustbebelow
$6.42x(100%4%)=$6.42x0.96=$6.16
Theactuallowpriceonthesetupdaywas$5.90,sowehavemetthecriteriaforthisrule.
Rule5requiresthattheclosingpricebeinthebottomX%ofthedaysrange.Weselected25%forthis
exercise,soourcalculationgoesasfollows:

ClosingRange=(CloseLow)/(HighLow)<25%

($5.91$5.90)/($6.45$5.90)<0.25
$0.01/$0.55<0.25
0.018<0.25TRUE
Inthiscase,wecouldhavesimplylookedatthechartandeasilyseenthattheclosingpricewas
extremelyclosetothedayslow,andthereforealmostcertainlyinthebottom25%ofthedaysrange.
Inothercases,thechartmaynotmakethissoobvious,andyoullhavetodothemath
Basedonourstrategyparameters,Rule6requirestheConnorsRSI(3,2,100)valuetobebelow10,which
itis(thevalueshownonthechartis2.91).
Rule7tellsusthatnowthatoursetupconditionshavebeenmet,weshouldsetalimitordertoenteron
thenexttradingday.Ourstrategyparametersspecifythatwewilluse8%forthislimitorder.That
meansthatourlimitpricewillbesetat:

$5.91x(100%8%)=$5.91x0.92=$5.44

Theactuallowpriceon5/18/2012was$5.42,whichmeetsourcriteriawithtwocentstospare.We
wouldenterthistradewhenourbuyordergetsfilledatthelimitpriceof$5.44.
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P a g e |19

Rule8specifiesthatwewillexitthetradewhenConnorsRSI(3,2,100)closesabove70.Forthistrade,
thatoccursontheverynexttradingday,whichisonMonday,5/21/2012.Weexitatorneartheclosing
priceof$6.07,givingusaprofitofover11.6%,excludingcommissions.
Asyoureviewtheexplanationabove,noticethatRules1through5weretrueformostorallofthedays
leadinguptothesetupday.Price,volume,andADXwereallatacceptablelevels.Therewereacouple
ofdecentselloffdays,aswellasclosingpricesinthebottom25%ofthedaysrange.However,
5/17/2012isthefirstdaythatalloftheseconditionsweremetandConnorsRSIdroppedbelow10.
Thatswhythisindicatoristhecenterpieceoftheentirestrategy.
Letsquicklygothroughonemoreexample.Sincewellbefocusingonexitsinalatersection,well
continuetouseanexitofConnorsRSI(3,2,100)>70.However,wellchangetheotherstrategy
parametersasfollows:

Selloff(W)=2%
ClosingRange(X)=10%
ConnorsRSI(3,2,100)=5
EntryLimit(Z)=6%

Hereisthechart,whichusesthesameconventionsasFigure1:

ChartcreatedinAmibroker.ReprintedcourtesyofAmiBroker.com.

Figure2:TradesignalsforWHX

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P a g e |20

Theclosingpriceof$9.97fulfillstheRule1requirementof$5/shareorgreater.
The2dayaveragevolumeof286,704meetstheRule2criteriaof250,000.
TheADX(10)valueis51.60,farabovetheRule3requirementof30.
Wecanseethaton7/17/2012(thedaypriortothesetupdayshownbythegrayverticalline)theprice
ofWHXclosedabitabove$15,whilethelowon5/18/2012wasbelow$10.Alittlementalarithmetic
tellsusthattheselloffwasover30%,sotheresreallynoneedtodotheexactmathtoverifythatweve
exceededthe2%sellofftarget,thusmeetingtheRule4requirement.
Likewise,itsobviousfromthechartthattheclosingpriceon7/18/2012wasinthebottom10%ofthe
daysrange,satisfyingRule5.
ThechartshowsusthattheConnorsRSI(3,2,100)valuewas2.55onthesetupday,whichmeansthatthe
criteriaforRule6hasbeenmet.
Rule7tellsustoenteralimitorder6%belowthesetupdaysclosingpriceof$9.97.Thatmeansour
limitpricefor7/19/2012willbe:

$9.97x(100%6%)=$9.97x0.94=$9.37

Theactualpriceon7/19/2012fallsallthewayto$8.20,butwewillenterthetradeatthelimitprice
whichwedeterminedinadvance:$9.37.
Finally,asperRule8,weexitthetradewhenConnorsRSI(3,2,100)closesabove70.Thisoccurstwo
tradingdayslater,onMonday,7/23/2012.
Inthenextsectionwelltakeacloserlookatexitmethods,andthenwelldiveintothetestresultsso
thatyoucandeterminewhichstrategyvariation(s)arethebestfitforyourowntrading.

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P a g e |21

Section4

TheRoleofExits

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P a g e |22

Uptothispoint,wehavebeenfocusedmainlyontheentryrulesfortheConnorsRSIPullbackStrategy.
Butentriesareonlyhalfthestory.Youdontmake(orlose)moneyuntilyouexitthetrade,sohavinga
precise,quantifiedexitmethodiscrucialtogeneratingpredictablereturns.Unfortunately,many
publishedstrategieseitherglossovertheexitrulescompletely,ortheyrelyonvaguedirectivessuchas
exitwhenyoureachyourprofittarget.Sincetheydontspecifyhowtocalculateareasonableprofit
target,thisisbasicallyequivalenttosayingexitwhenyoufeellikeyouvemadeenoughmoney,which
isnotveryhelpfulatall.
Letstalkconceptuallyaboutentriesandexitsforamoment.Bothentryandexitrulescanbethoughtof
intermsofhowstricttheyare,i.e.howeasyordifficulttheyaretoachieve.Youmightalsosaythat
strictnessisameasureofhowfrequentlyorinfrequentlytheruleconditionsoccur.Foroscillatorssuch
asConnorsRSI,valuesthatareclosertotheextremes(0and100)aremorestrict(lesslikelytooccur)
thanvaluesthatareinthemiddleoftherange.
Stricterentryruleswillbesatisfiedlessfrequentlythanmoreleniententryrules,andthusastrategy
thatreliesonthestricterruleswillgenerallygeneratefewertradesthanastrategywhoseentryrulesare
moreeasilysatisfied.Witharobuststrategy,therewardforfewertradesisgenerallyahighergainper
trade,onaverage.Wellquantifythisinthenextsectionwhenwelookattestresults.Fornow,allowus
tosimplystatethatifyoubuyaslightlyoversoldstock,itsmostlikelytohaveamoderaterebound.But
ifyouwaitforastockthatsextremelyoversold,thechancesaremuchhigherthatitwillhavea
significantbounceandcreateabiggerprofit.
Thestrictnessofexitruleshaslittleeffectonthenumberoftradesgeneratedbythestrategy.However,
justliketheentryrules,stricterexitrulestypicallyresultinhigheraverageprofits.Why?Because
stricterexitrulestendtokeepyouinyourtradesforalongertime,givingthestockmoretimeto
experiencethemeanreversionbehaviorthatwereattemptingtoexploitwithastrategylikethe
ConnorsRSIPullbackStrategy.Thus,forentriesthetradeoffisbetweenmoretradesandhighergains
pertrade,whileforexitsthetradeoffisbetweenshortertradedurationsandhighergainspertrade.
Forthisstrategy,wevedecidedtokeeptheexitmethodsverysimple.ItturnsoutthatConnorsRSIis
notjustagreatentryindicator;itsalsoaveryreliablemethodformeasuringthedegreetowhichweve
capturedthemeanrevertingpricebounce.Therefore,ourexitmethodssimplywaitfor
ConnorRSI(3,2,100)toreachapredeterminedlevel.Wevefoundthatvaluesinthe50to80rangeare
themosteffectiveexitindicators,andwewillpresenttestresultsforConnorsRSI=50,60,70and80.
Withthesedifferentexitmethodsinmind,wecanrevisitapreviousexampletoseethetrade
duration/profittradeoffinaction.HeresthechartforWHXthatwedissectedpreviously:

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P a g e |23

ChartcreatedinAmibroker.ReprintedcourtesyofAmiBroker.com.

Figure3:TheEffectofExits

Noticethatonthedayfollowingthetradeentry,theConnorsRSI(3,2,100)valuerosetoaround68.If
ourexitcriteriahadbeenaConnorsRSIvalueof65,thenwewouldhaveexitedthetradeafteroneday,
atapricearoundthatdayscloseof$9.39.
Ouractualexitoccurredtwodaysafterenteringthetrade.TheConnorsRSI(3,2,100)valueonthisday
was75.48,soifourcriteriahadbeenavalueof70or75,wewouldhaveexitedonthisdaynearthe
closingpriceof$10.37.Wewouldhaveachievedahigherprofit,butourtradedurationwouldhave
beendoublewhatitwaswiththemorelenientexit.
Threedaysaftertheentry,ConnorsRSI(3,2,100)closedat79.16,andthepriceclosedat$10.82.Thus,if
ourexitcriteriahadbeenbetween76and79,wewouldhavestayedinthisparticulartradeforatotalof
threedays,butwouldhaveachievedthemaximumpotentialprofit.
Finally,itsworthnotingthatConnorsRSI(3,2,100)neverwentabove80beforethepricestartedto
declineagain.Inotherwords,ifwemakeourexitcriteriatoostrict,theresadangerthatwewontexit
thetradebeforetheprofitsstarttoevaporate.OurresearchhasshownthatusingaConnorsRSIvalue
of85orhigherasanexitindicatoristoorestrictivetobeeffective,andwilltypicallycauseyouroverall
resultstosuffer.

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P a g e |24

Section5

TestResults

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P a g e |25

Wecanneverknowforsurehowatradingstrategywillperforminthefuture.However,forafully
quantifiedstrategysuchastheConnorsRSIPullbackStrategydescribedinthisGuidebook,wecanat
leastevaluatehowthestrategyhasperformedinthepast.Thisprocessisknownasbacktesting.
Toexecuteabacktest,wefirstselectagroupofsecurities(sometimescalledawatchlist)thatwewant
totestthestrategyon.Inourcase,thewatchlistiscomprisedofstockstradedonU.S.exchanges.No
ETFs,options,futuresorotherderivativeproductsareincluded.Nextwechooseatimeframeover
whichtotest.Thelongerthetimeframe,themoresignificantandinformativethebacktestingresults
willbe.ThebacktestsfortheConnorsRSIPullbackStrategystartinJanuary2001andgothrough
September2012,thelatestdateforwhichwehavedataasofthiswriting.Finally,weapplyourentry
andexitrulestoeachstockfortheentiretestperiod,recordingdataforeachtradethatwouldhave
beenentered,andaggregatingalltradedataacrossaspecificstrategyvariation.
OneofthekeystatisticsthatwecangleanfromthebacktestresultsistheAverage%Profit/Loss,also
knownastheAverageGainperTrade.Sometradersrefertothisastheedge.TheAverage%P/Lis
thesumofallthegains(expressedasapercentage)andallthelosses(alsoasapercentage)dividedby
thetotalnumberoftrades.Considerthefollowingtentrades:
TradeNo.
1
2
3
4
5
6
7
8
9
10

%GainorLoss
1.7%
2.1%
4.0%
0.6%
1.2%
3.8%
1.9%
0.4%
3.7%
2.6%

TheAverage%P/Lwouldbecalculatedas:
Average%P/L=(1.7%+2.1%4.0%+0.6%1.2%+3.8%+1.9%0.4%+3.7%+2.6%)/10
Average%P/L=1.08%
Forshorttermtradeslastingthreetotentradingdays,mosttraderslookforanAverage%P/Lof0.5%
to2.5%acrossalltrades.Allotherthingsbeingequal,thelargertheAverage%P/L,themoreyour
accountwillgrowovertime.Ofcourse,allotherthingsareneverequal!Inparticular,itsimportantto
considertheNumberofTradesmetricincombinationwithAverage%P/L.Assumingthatyouuse
approximatelythesameamountofcapitalforeachtradethatyouenter,youllmakealotmoremoney
ontentradeswithanaverageprofitof10%pertradethanyouwillononetradethatmakes20%.

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P a g e |26

AnotherimportantstatisticistheWinningPercentage.Thisissimplythenumberofprofitabletrades
dividedbythetotalnumberoftrades.Inthetableabove,7ofthe10tradeswereprofitable,i.e.had
positivereturns.Forthisexample,theWinningPercentageis7/10=70%.
WhydowecareaboutWinningPercentage,aslongaswehaveasufficientlyhighAverage%P/L?
BecausehigherWinningPercentagesgenerallyleadtolessvolatileportfoliogrowth.Losingtradeshave
awayofclumpingup,andwhentheydothat,thevalueofyourportfoliodecreases.Thisisknownas
drawdown.Thosedecreases,inturn,canmakeyoulosesleeporevenconsiderabandoningyourtrading
altogether.Iftherearefewerlosers,i.e.ahigherWinningPercentage,thenlossesarelesslikelyto
clump,andyourportfoliovalueismorelikelytogrowsmoothlyupwardratherthanexperiencingviolent
upanddownswings.
LetsturnourattentiontothetestresultsforthedifferentvariationsoftheConnorsRSIPullback
strategy.First,welllookatthe20variationsthatproducedthehighestAverage%P/L.
Top20VariationsBasedonAvg%P/L

#
Trades
472
557
628
706
796
588
869
473
870
473
697
999
734
558
786
655
668
1120
473
883

Avg
%P/L
14.97
14.70
14.66
14.63
14.04
13.87
13.76
13.72
13.72
13.64
13.61
13.56
13.51
13.47
13.47
13.40
13.34
13.32
13.29
13.19

Avg
Days
Held Win%
7.03
78.81
7.16
78.64
7.21
78.66
7.34
78.33
7.41
77.39
7.01
78.40
7.50
77.33
3.21
79.70
7.29
77.47
2.14
80.55
7.11
78.48
7.45
76.88
7.34
76.57
3.23
79.75
7.21
78.37
7.06
78.17
7.08
78.29
7.58
76.70
1.84
80.34
7.33
77.35

Sell
Off%
8
8
8
8
8
6
8
8
8
8
6
8
8
8
6
4
2
8
8
6

Closing
Range
10
10
10
10
10
10
10
10
25
10
10
25
25
10
10
10
10
25
10
10

Connors
RSIEntry
5
6
7
8
9
5
10
5
6
5
6
7
5
6
7
5
5
8
5
8

Entry
Limit
10
10
10
10
10
10
10
10
10
10
10
10
10
10
10
10
10
10
10
10

ExitMethod
CRSI(3,2,100)>80
CRSI(3,2,100)>80
CRSI(3,2,100)>80
CRSI(3,2,100)>80
CRSI(3,2,100)>80
CRSI(3,2,100)>80
CRSI(3,2,100)>80
CRSI(3,2,100)>70
CRSI(3,2,100)>80
CRSI(3,2,100)>60
CRSI(3,2,100)>80
CRSI(3,2,100)>80
CRSI(3,2,100)>80
CRSI(3,2,100)>70
CRSI(3,2,100)>80
CRSI(3,2,100)>80
CRSI(3,2,100)>80
CRSI(3,2,100)>80
CRSI(3,2,100)>50
CRSI(3,2,100)>80

Hereisanexplanationofeachcolumn.
#TradesisthenumberoftimesthisvariationtriggeredfromJanuary1,2001September30,2012.

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P a g e |27

Average%P/Listheaverageprofitorlossforalltrades,includingthelosingtrades,expressedasa
percentage.Thetop20variationshaveallshownpositivegainsranging13%tonearly15%.
AverageDaysHeldisthenumberofdaysonaveragethetradewasheld.Inallcasesitseightdaysor
less.
Win%isthepercentageofsignalswhichclosedoutataprofit.Thetop20variationshaveallbeeninthe
75%80%range,anextremelyhighlevelinaworldwheremostsuccessfultradershopetobecorrect
55%60%ofthetime.
SellOff%correspondstoRule4ofthestrategy.Itistheminimumrequireddropinpriceonthesetup
day,expressedasapercentage.
ClosingRangeisspecifiedbyRule5ofthestrategy.Itisthemaximumalloweddifferencebetweenthe
closingpriceandthelowpriceoftheday,expressedasapercentageofthetotaldailyrange(high
low).
ConnorsRSIEntryisthemaximumallowedConnorsRSI(3,2,100)valueonthesetupday.Thisvalue
correspondstoRule6ofthestrategy.
EntryLimitistheintradaypullbackusedtotriggeranentry.Thismeansthatthebuytriggeroccursthe
nextdayZ%belowtheclosingpriceonthesignalday,asdescribedinRule7ofthestrategy.Thereforeif
todaygeneratesasetup,thesignalisexecutedonlyifthestockpullsbackfurthertomorrow.Inour
testingwelookedat4%10%limits.Asyoucansee,10%dominatesthelistabove,furtherreinforcing
thefactthatthelargertheintradaypullback,thegreatertheedges.
ExitMethodisthemethodusedtodeterminewhentoexitthetrade.Manyofthetop20variationsas
measuredbyAverage%P/LusedanexitmethodofConnorsRSI(3,2,100)>80,meaningthatweexitthe
tradeonthefirsttradingdaywheretheConnorsRSI(3,2,100)valueisgreaterthan80attheclose.Thisis
whatweexpectbasedonourpreviousdiscussionofhowstricterexitcriteriagenerallyleadtohigher
gainsbutalsolongertradedurations.
Whatweseeaboveare20differentvariationsoftheConnorsRSIPullbackstrategywhichshow
consistentbehaviorovermorethanadecade.Thekeyistochoosethevariationorvariationsthatbest
complementyouroveralltradingplanandthenapplytheminasystematic,structuredmanner.
Nowletsnowlookatthe20highestperformingvariationsasmeasuredbypercentagecorrect.

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P a g e |28

Top20VariationsBasedonWin%

#
Trades
473
473
874
558
1085
589
1272
1041
1015
1234
737
1004
707
909
558
473
670
910
589
657

Avg
%P/L
13.64
13.29
12.81
13.17
11.97
12.48
11.21
11.79
11.89
11.36
13.00
12.30
12.74
12.36
13.47
13.72
12.06
12.01
12.66
12.13

Avg
Days
Held Win%
2.14
80.55
1.84
80.34
3.24
80.21
2.18
80.11
3.22
80.09
1.82
79.97
3.17
79.95
3.07
79.92
3.07
79.90
3.17
79.90
3.21
79.78
3.34
79.78
3.30
79.77
3.14
79.76
3.23
79.75
3.21
79.70
1.80
79.70
1.77
79.67
2.15
79.63
1.80
79.60

Sell
Off%
8
8
8
8
6
6
2
2
4
4
8
8
8
6
8
8
2
6
6
4

Closing
Range
10
10
25
10
25
10
25
25
25
25
25
25
10
25
10
10
10
25
10
10

Connors
RSIEntry
5
5
6
6
6
5
6
5
5
6
5
7
8
5
6
5
5
5
5
5

Entry
Limit
10
10
10
10
10
10
10
10
10
10
10
10
10
10
10
10
10
10
10
10

ExitMethod
CRSI(3,2,100)>60
CRSI(3,2,100)>50
CRSI(3,2,100)>70
CRSI(3,2,100)>60
CRSI(3,2,100)>70
CRSI(3,2,100)>50
CRSI(3,2,100)>70
CRSI(3,2,100)>70
CRSI(3,2,100)>70
CRSI(3,2,100)>70
CRSI(3,2,100)>70
CRSI(3,2,100)>70
CRSI(3,2,100)>70
CRSI(3,2,100)>70
CRSI(3,2,100)>70
CRSI(3,2,100)>70
CRSI(3,2,100)>50
CRSI(3,2,100)>50
CRSI(3,2,100)>60
CRSI(3,2,100)>50

Whenlookingatthevariationswhichhavebeencorrectthemostoften,weseeabroaderarrayof
strategyparameters.However,theWinRatesareallverycloseto80%forthetimeperiodfrom2001
throughSeptember2012.Suchconsistentresultsfromavarietyofstrategyvariationsoveralongperiod
oftimeconfirmtherobustnatureoftheConnorsRSIPullbackstrategy.
Forsometraders,themostimportantmetricsforevaluatingastrategymayrevolvearoundcapital
management.Forthesetraders,itsacceptabletogiveupaportionofthegainsiftheycangettheir
moneybackmorequicklysothatitcanbedeployedelsewhere.So,letstakealookatthestrategy
variationsthathavetheshortesttradedurationsasmeasuredbyAverageDaysHeld.

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P a g e |29

Top20VariationsBasedonAverageDaysHeld

#
Trades
1042
1016
910
1273
738
1235
670
657
1474
1497
1451
1086
1419
1619
1694
589
875
1242
1281
1826

Avg
%P/L
11.47
11.57
12.01
10.54
12.61
10.68
12.06
12.13
9.62
9.03
9.13
11.27
9.74
9.12
8.95
12.48
12.09
10.29
9.54
8.29

Avg
Days
Held Win%
1.75
79.46
1.75
79.43
1.77
79.67
1.78
77.77
1.79
79.40
1.79
77.65
1.80
79.70
1.80
79.60
1.80
76.19
1.80
76.09
1.80
75.88
1.81
77.99
1.81
76.04
1.81
75.36
1.81
75.27
1.82
79.97
1.82
78.40
1.82
76.25
1.82
75.64
1.82
74.92

Sell
Off%
2
4
6
2
8
4
2
4
2
2
4
6
4
4
2
6
8
6
6
2

Closing
Range
25
25
25
25
25
25
10
10
25
25
25
25
25
25
25
10
25
25
25
25

Connors
RSIEntry
5
5
5
6
5
6
5
5
7
5
5
6
7
8
8
5
6
7
5
6

Entry
Limit
10
10
10
10
10
10
10
10
10
8
8
10
10
10
10
10
10
10
8
8

ExitMethod
CRSI(3,2,100)>50
CRSI(3,2,100)>50
CRSI(3,2,100)>50
CRSI(3,2,100)>50
CRSI(3,2,100)>50
CRSI(3,2,100)>50
CRSI(3,2,100)>50
CRSI(3,2,100)>50
CRSI(3,2,100)>50
CRSI(3,2,100)>50
CRSI(3,2,100)>50
CRSI(3,2,100)>50
CRSI(3,2,100)>50
CRSI(3,2,100)>50
CRSI(3,2,100)>50
CRSI(3,2,100)>50
CRSI(3,2,100)>50
CRSI(3,2,100)>50
CRSI(3,2,100)>50
CRSI(3,2,100)>50

Asyoumightexpectfromourearlierdiscussion,thestrategyvariationswiththeshortesttrade
durationsaredominatedbythemostlenientexitthatwetested,whichisanexitwhen
ConnorsRSI(3,2,100)isgreaterthan50.All20ofthesevariationshaveaveragedurationsoflessthan
twodays.Whatyoumightnothaveexpectedistostillseeaveragegainspertradeof8%12.5%!

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TradingOptionsUsing
theConnorsRSI
PullbackStrategy
Section6

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PleasenotethattheoptionssectioninthemajorityoftheConnorsResearchTradingStrategySeriesis
thesamebecausethestrategysetupsofteninvolvelargemovesinbriefperiodsoftime.Inouropinion,
andconfirmedfromfriendswhoareprofessionaloptionstraders(onewithoverthreedecadesof
experience);thereisonebestwaytotrademoveslikethese.
Optionstradinghasbeenamajorgrowthindustryoverthepast5yearsinthemarkets.Thisisbecause
spreadshavetightened,liquidityhasincreased,andtheabilitytoeasilytradecomplexoptionshasnever
beensimpler.
Wellnowfocusonapplyingoptionstradingtotheshorttermmarketmoveswehavejustlearned.Like
everythingelseinthisGuidebook,therearedefinitiverulesastohowtoexecuteanoptionstradewhen
astrategysignaltriggers.
Hereiswhatweknowbaseduponthedata:
1.Themajorityofthemovesfromentrytoexithavebeenheldaveryshortperiodoftime(27
tradingdays).
2.Theaveragegainspertradehavebeenlargewellbeyondthenormaldistributionofprices
overthatshortperiodoftime.
3.Ahighpercentageofthemoveshavebeencorrect.
Whenwelookatthistypeofbehavior,itcanleadtomanystrategiesbutonestrategystandsout(and
thishasbeenconfirmedbyprofessionaltraders).Thestrategyistobuyfrontmonth,inthemoneylong
calls.
Whyfrontmonthinthemoneylongcalls?Becausetheywillmovetheclosesttothestockitself.And
thecloseranoptionmoveswiththestock,thegreaterthegainwillbeonapercentagebasiswhenthe
moveiscorrect.
Herearetherules.
1.Asignaltriggers.
2.Buythefrontmonthinthemoneycall.Ifyouweretonormallybuy500sharesofstock,buy5
calls(every100sharesshouldequalonecall).
3.Exittheoptionswhenthesignaltriggersanexitonthestock.
Letsgofurther:
1.Whatdoesinthemoneyexactlymeanhere?
Inthiscaseitsdefinedasonetotwostrikepricesinthemoney.Ifthestockisat48,buythe40or45
calls.
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2.Whatdoesfrontmonthmean?
Becausetheholdingperiodissoshort,youwanttotradetheoptionswhosemonthlyexpirationisthe
closest.Iftheclosestmonthis7tradingdaysorlessfromthefrontmonthsoptionexpirationdate
(meaningthesecondThursdaybeforeorcloser)usethefollowingmonthastheonetotrade.
3.WhathappensifIminthepositionanditexpiresyetthesignalforthestockisstillvalid?
Inthiscase,rolltothenextmonth.Youretradingthestocksignalssoyouwanttohaveexposuretothat
signal.
4.Whataboutliquidityandspreads?
Theressomediscretionhere.Thereisnohardandfastruleastowhatexactlyliquiditymeansin
options.Forexample,comparetheliquidityofyourstocktoSPY,whichisextremelyliquidcomparedto
abluechipstock.Bothcanbeconsideredliquid,butthebluechipsoptionwillbelessliquidthanSPY.
Assumingthereisactivevolumeintheoptions,lookatthespreads.Iftheoptionistrading3.00bid
3.30offer,thespreadis10%.Canyoureallyovercomea10%spread?Notlikely.Nowcomparethisto
anoptionthatstradingat3.25bid3.30offer.Thisisfarmoreacceptableandtradable.
5.Whataretheadvantagesofbuyingcalloptionsinsteadofthestock?
Assumingthespreadsandliquidityarethere,theadvantagesarelarge:
1.GreaterpotentialROIoncapitalinvested.
2.Lessmoneytiedup.
3.Lesspointsatrisk.Thismeansifastocksignalsat50,itcanloseupto50points.Theoptions
canonlyloseuptothepremiumyoupaid.So,ifyouboughtthe45calls,theriskisonlythe
premium.
4.Theresgreaterflexibility.Forexample,letssaythestocktriggeredabuysignalat50and
youpaid5.50forthe45calls.Ifthestockimmediatelymoveshigher(letssayto56);you
havechoiceshere.Youcanexit,oryoucanrollintothe50callsgettingmostofyourmoney
outandnowturningthisintoanearlyfreetradeifyoubelievethatpriceswillcontinueto
run.
Therearenumerousexampleslikethisandyoucanfindthesetypesofstrategyopportunitiesinmost
optionsbooks.Buttradinganythingexoticordifferentthansimplybuyingthecallsisagainsttheadvice
ofthemanyprofessionalsweposedthisquestionto.
Inconclusion,optionsprovidetraderswithagoodalternativetobuyingthestockoutright.The
structuredmethodologyforourstrategiesis:frontmonth,inthemoney,withequivalentsizing(1
optionper100shares),andexitingwhenthesignalexits.
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Theaboveoptionsstrategy,inmanyexpertsopinion,isthebestandmostefficientstrategybasedupon
thehistoricaldatafromthesesignals.

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AdditionalThoughts
Section7

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1.AsyouhaveseenthroughoutthisGuidebook,theConnorsRSIPullbackstrategyhashadlarge
quantifiededgeswhenappliedinasystematicmanner.
2.Thereareliterallyhundredsofpotentialvariationsforyoutouse.Byadjustingtheinputvariables
describedintherules,youcancustomizehowtheConnorsRSIPullbackstrategywillperformforyou.
Wantmoretrades?LookatvariationswithasmallerSellOff%orEntryLimit.Biggeraveragereturns?
Checkoutthevariationsthathavethestrictestentrycriteria(highSellOff%andEntryLimit%and/or
lowentryvalueforConnorsRSI)andlongestdurations(ConnorsRSI80exitmethod).Wanttogetinand
outoftradesmorequicklytoreduceovernightriskandfreeupyourcapitalforothertrades?Trythe
variationsthatutilizetheConnorsRSI50exitmethod.Onceyouunderstandhowthestrategyvariables
affecttheresults,youcanidentifythevariationorvariationsthatbestfityourtradingstyle.
3.Whataboutstops(andweincludetheanswertothisinallourStrategyGuidebooks)?
WehavepublishedresearchonstopsinotherpublicationsincludinginourbookShortTermTrading
StrategiesThatWork.
Whatwehavefoundisthatstopstendtolessenperformanceandinmanycasestheycompletely
removeedges.Yes,itfeelsgoodwhenastockkeepsmovinglowerandlowerandastopgotyouout.On
theotherside,theresearchwhichisbackedbyuptotwodecadesoftestresultsonmanyshortterm
tradingstrategiessuggeststhatstopsgethitoftenandaccumulatemany,manylosses.Fewtrading
strategiescanovercometheseaggregatedlosses.
Formanytradersstopsareamust.Psychologicallyitallowsthemtotaketrades,especiallydifficult
trades.Whetheryouusethemornotisapersonalchoice.Onthewholethough,theedgesyouseein
thisstrategyandmanyothershorttermstrategiesarelowerwhenstopsareappliedtothem.Againthis
isapersonalchoiceonlyyoucanmakeforyourself.Weknowsuccessfultradersinbothcamps.
4.Slippageandcommissionwerenotusedinthetesting.Factorthemintoyourtrading(theentriesare
atlimitpricessoslippageisnotanissue)andmakesureyouaretradingatthelowestpossiblecosts.
Mostfirmsarenowallowingtraderstotradeforunder1centashare,soshopyourbusiness,especially
ifyouareanactivetrader.Theonlinebrokeragefirmswantyourbusiness.
5..AsyouhaveseenherewiththeConnorsRSIPullbacksStrategy,therearelargeedgesinstocks
whichselloffandthensellofffurtherintraday.Thesetradesareoftenaccompaniedbyfearand
uncertaintyandthisiswhenlargeedgesappear.Seekoutthesetradesbecause,asyouhaveseen,
theyvebeenlucrativeformanyyears.
WehopeyouenjoyedthisadditiontotheConnorsResearchTradingStrategySeries.Ifyouhaveany
questionsaboutthisstrategypleasefeelfreetoemailusatinfo@connorsresearch.com

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ReceiveConnorsRSIReadingsforFreefromtheTradingMarketsScreener

http://analytics.tradingmarkets.com/Screener/

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AlphaClub:Stocks,ETFs,Volatility&OptionsStrategiesAnnualMembership

WhenYouGetReadytoTrade...

WhereDoYouLookfor"Alpha"?
IntroducingTradingMarkets"Alpha"Club
Asanactivetrader,youarenotcontentwithreturnspeggedtothemarketindexes.Youdemand
better.Andyoucontinuallyseektolearnnewwaystogenerate"alpha"whichiswhatprofessionals
callreturnsabovethebenchmarkmarketindices.
Mosthedgefundsrelyonagilitytooutperformthemarket.Theyimplementnewstrategiesconstantly.
Andinorderforyou,asanindividualtrader,tobeatthoseindicestogenerateyourownalphayou
aremostlikelyalsoalwayslookingfornewtradingstrategies.
We'vejustmadeiteasierforyoutofindnewtradingstrategiesthathavethepotentialtogenerate
significant"alpha".It'scalledtheTradingMarketsAlphaClub.

BuildYourTradingStrategiesArsenalOnebyOne...
EveryMonth
TheTradingMarketsAlphaClubisaresearchorientedgroupdesignedtoprovideyouwithquantified,
highprobabilitystrategiesinStocks,Options,ETFs,andVolatilitystrategiesthathavehistorically
shownsignificant"alpha"insimulated,backtestedresultsoverseveralyears.

Here'showitworks:

TheClubmeetsonceeachmonth,online.Themeetingsrunabout12hoursandareledbyLarry
Connorsandhisresearchteam.

Youwilllearnonenewstrategyeachmonth.Larryandhisresearchteamwillcoverthebackground,
simulatedhistoricalresults,quantifiedperformancemetrics,andimplementationrulesforevery
strategy.

EverystrategywillbedistributedexclusivelytoClubMembersonly.Thesestrategieswillnotbe
madeavailabletothegeneralpublicfor12months.Wedothistoensurethatyourcompetitiveedge
asaclubmemberisprotectedtothebestofourability.
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Timewillbeallottedateverymeetingtodiscussfeedbackandquestionsfrommembersabout
previousstrategiesandothertopicscoveredinpriorsessions.

Everysessionwillberecordedforyourconveniencetowatchagain(orifyoucan'tattendthelive
event).

TherearetwoAlphaClubtracksforyoutochoosefrom:

Stocks&ETFsTradingAlphaClub

Volatility&OptionsTradingAlphaClub

Andmoretocome.Youcanjoinasmanyclubsasfityourneedsandinterests.
That'stheTradingMarketsAlphaClubinanutshell.We'vemadeitassimpleandefficientaspossibleto
giveyouwhatyouneedtobecompetitiveasanindividualtraderintoday'smarkets.
Bestofall,youwon'tneedtogosearchingfornewtradingstrategiesyoucantrust,wewillbringthem
toyoueachmonththemostpromisingstrategiestocomeoutofConnorsResearch.As
aTradingMarketsAlphaClubmember,everymonthyouwillreceiveanew,quantified,rulesbased
strategytohelpyoutradescientificallyandprofessionallyandincreaseyourabilitytogeneratealpha.

AbouttheStrategies&ResearchYouWillReceive
EachMonth

Thestrategiesandresearchwillbebrandnew,basedonunpublishedresearch.

Everystrategywillincludefulldisclosureonthebacktested,simulatedhistoricalresultsderived
fromyearsoftradingdata.

Precisetradingrulesandthetoolstoexecutethestrategieswillbeprovidedtoyoueachmonth.

TradingMarketsAlphaClubisaUniqueOpportunity

Theinternetisfilledwithpeopletoutingpersonalopinions.Thereisverylittlecredible
researchavailabletoindividualtraders,andthegoaloftheTradingMarketsAlphaClubistoprovide
thisforyou.

Ourresearch&strategieshavestoodthetestoftime.TradingMarketshasbeeninbusinesssince
January1999,andourCEOLarryConnorshasbeenpublishinghighqualityprofessionaltrading
researchandstrategiessince1995.
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TradingMarketsAlphaClubgivesyoutheopportunitytoworkdirectlywithLarryandhisresearch
teameverymonth,asyoucontinuouslybuildoutyourknowledge.

Ifyouareseriousaboutyourtrading,youneedthesametypeofconsistenttrainingasprofessional
athletesget12monthsayear.YouwillreceiveitasamemberoftheTradingMarketsAlphaClub.

IfyouwouldlikemoreinformationonTheAlphaClubclickhere.Ifyouwouldliketoorderyoucanhave
immediateaccesstoitpleaseclickhereorcalltollfree8884848220ext.1(outsidetheUSpleasedial
9734947311ext.1).

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MorefromtheConnorsResearchTradingStrategySeries

TradingwithBollingerBandsAQuantifiedGuide
ThisSystematicApproachtoTradingwithBollingerBandsBringsYouResultsQuickly
BollingerBandsareusedbyhundredsofthousandsoftradersaroundtheworld.Infact,itsconsidered
oneofthemostpowerfultradingtoolsavailabletotraders.Overthepasttwodecadesmany
professionaltradersatlargefunds,successfulCommodityAdvisors,andprofessionalEquityTraders
havestatedtheyrelyuponBollingerBandsasoneofthemainindicatorsbeforetheytakeatrade.
Whentradedcorrectly,BollingerBandscanbeoneofthemostconsistentstrategiesavailableforyour
trading.
Nowforthefirsttime,wearemakingavailabletothepublicafullysystematic,quantifiedapproachto
tradingwithBollingerBands.
ConsistentTradingResultsWhatyouwilllearnwiththisstrategyaredozensofBollingerBandsstrategy
variationswhichhavebeencorrectfrom65.43%uptoover82.74%fromJanuary2001toMay2012.
TheTradingwithBollingerBandsAQuantifiedGuidecomeswitha100%MoneyBackGuarantee(as
doalltheGuidebooksinourStrategySeries).
IfyouwouldlikemoreinformationonTradingwithBollingerBandsAQuantifiedGuideclickhere.If
youwouldliketoorderanddownloaditnowsoyoucanhaveimmediateaccesstoitpleaseclickhereor
calltollfree8884848220ext.627(outsidetheUSpleasedial9734947333).

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MorefromtheConnorsResearchTradingStrategySeries

TheLongPullbacksStrategy
In2005wepublishedwhatweconsidertobeourmostpowerfulshorttermtradingstrategythatwe
originallynamedthe5x5x5Strategy.Manyhundredsoftraderslearnedthestrategyandmanystilluseit
today.Sincethattimewehaveupdatedandimprovedthestrategy,addednewentryparameters,added
newexitstrategies,andhaveupdatedthetraderesultsbeginningfrom20012011.
Whatyouwilllearnwiththisstrategyaremanyhundredsofvariationsthathavebeencorrectfrom
72.4%uptoover78%formorethanadecade.Andtheaveragegainpertrade(thisincludesallwinning
andlosingtrades)hasaveragedover5.6%atradeondozensofvariationsofthestrategy.
Youwilllearnhowtoidentifythesetup,select,theentrylevel,wheretoplacetheorderandwhereto
exittheorder.ThisisdoneonallliquidUSstocks(anditcanbedoneonglobalmarketsaswell).Andas
anaddedbonuswealsoaddedadaytradingcomponenttothisstrategyforthoseofyouwholiketoexit
positionsbeforethecloseeachday.
TheLongPullbacksStrategycomeswitha100%MoneyBackGuarantee(asdoalltheGuidebooksinour
StrategySeries).
IfyouwouldlikemoreinformationonTheLongPullbacksStrategyclickhere.Ifyouwouldliketoorder
anddownloaditnowsoyoucanhaveimmediateaccesstoitpleaseclickhereorcalltollfree888484
8220ext.627(outsidetheUSpleasedial9734947333).

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ETFGapTrading:ADefinitiveGuide
IfyoutradeETFsyouwillsoonseethattradingGapsonETFs,whendonecorrectly,canbetheoneof
themostprofitablestrategiesavailabletoyouinETFTrading.
TheaveragegainspertradefromtradingthegapsastaughtinthisSeriesrangesallthewayuptoover
4%pertrade(asubstantialnumberforETFs).AndweaddedaLeveragedETFsectionwheretheaverage
gainsgetabove5.5%trade.
HistoricallythemajorityoftheETFGapsetupshavebeencorrect7177%ofthetime.AndliketheLong
PullbackStrategieswevealsoaddedadaytradingaspecttotradinggapswhichallowyoutodaytrade
ETFsbothonthelongandtheshortside.
TheETFGapTradingStrategyalsocomeswitha100%MoneyBackGuarantee.
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Forthreedecades,gaptradinghasbeenoneofthemostpopularandsuccessfulstrategiesfortraders
whohaveidentifiedwhenandhowtotradestockgaps.Theproblemisthatthereareliterallythousands
ofgapseveryyear.Sohowdoestheaveragetraderknowwhichonestotrade,wheretoenterthemand
wheretoproperlyexitthepositions?
Nowforthefirsttime,youhavetheopportunitytolearnwhatmanyprofessionalsalreadyknowabout
gaptrading:whenitsdonecorrectly,itcanbeextremelylucrative.
IfIcouldonlytradeonestrategy,itwouldbeearlymorninggaps
KevinHaggertyFormerHeadofTradingFidelityCapitalMarkets
HowtoTradeHighProbabilityStockGapsalsocomeswitha100%MoneyBackGuarantee.
IfyouwouldlikemoreinformationontheHowtoTradeHighProbabilityStockGapsGuidebookclick

here.Ifyouwouldliketoorderanddownloaditnowsoyoucanhaveimmediateaccesstoitplease
clickhereorcalltollfree8884848220ext.627(outsidetheUSpleasedial9734947333).

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