Connors RSI 2 (Mean reversion)
Connors–Alvarez RSI-2: buys when the 2-bar RSI drops below 10 while price is above its 200-bar average — fading a sharp dip inside an uptrend — and sells when price closes back above its 5-bar average.
How It Works
- Compute a very short 2-bar RSI (a dip detector), a 200-bar SMA (the long-term trend filter), and a 5-bar SMA (the exit line).
- Buy when the 2-bar RSI drops below 10 while the close is still above the 200-bar average — a sharp two-bar sell-off inside a market that is in a long-term uptrend.
- Sell as soon as the close rises back above its 5-bar average — the dip has bounced; the trade never waits for a big move.
Worked example. Price sits at 110 with the 200-bar average at 100, so the uptrend filter passes. Two straight down-bars knock price to 104 and push the 2-bar RSI to 6 — buy. Two bars later the close pops to 106.5, above its 5-bar average of 106 — sell the bounce.
The Math Behind The Indicators
Everything runs on closing prices of the traded timeframe: P is a close, Pt today's close, and N counts bars — one bar is one candle of that timeframe, so 20 bars on a 1h chart is 20 hours.
- Relative Strength Index (RSI)
- A 0–100 gauge of how one-sided recent moves have been. It compares G, the average size of up-moves, to L, the average size of down-moves, over the last N bars (using Wilder's smoothed averages): near 100 almost every recent bar went up, near 0 almost every bar went down, 50 is balanced.
- \[\mathrm{RSI}_N = 100 - \dfrac{100}{1 + G/L}\]
- Example: If over the last 14 bars up-moves averaged 2.0 and down-moves averaged 1.0, then G/L = 2 and RSI = 100 − 100 / 3 ≈ 67. Readings below 30 are called oversold, above 70 overbought.
- Simple Moving Average (SMA)
- The plain average of the last N closing prices: add them up, divide by N. It smooths out bar-to-bar noise so the underlying direction is easier to see — a rising SMA means recent prices sit above where they used to be.
- \[\mathrm{SMA}_N = \dfrac{P_1 + P_2 + \cdots + P_N}{N}\]
- Example: With N = 3 and closes 100, 102, 104 the SMA is (100 + 102 + 104) / 3 = 102.