The Larry Connors R3 strategy
Description of this Larry Connors strategy
The R3 trading strategy was designed by the well-known trader Larry Connors. The strategy first appeared in his book “High Probability ETF Trading”. Although Connors created this strategy for ETFs, the general principles can be applied to other financial instruments
Larry Connors’ main objective was to design a strategy with many more winning trades than losing trades. You can read in the back-test section below if he succeeded.
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The R3 strategy
Based on his research and experience, Larry Connors developed into a big fan of the 2-period RSI indicator. The R3 strategy is a mean reversion strategy, which primarily uses the 2-period RSI.
The general idea is to find a good entry point after a mean reversion and when the 2-period RSI enters the extreme overbought (oversold) territory while the overall trend direction remains intact.
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When to open a position
Trader Larry Connors uses 4 criteria for a trading signal. Three of these criteria are based on the RSI, hence the name R3.
A buy trading signal
1. The market price is > the 200-day moving average.
2. The 2-period RSI drops three days in a row.
3. On the first day of the 3-day drop, the RSI value is already < 60.
4. The 2-period RSI of the current day closes < 10.
A short sell trading signal
1. The market price is < the 200-day moving average.
2. The 2-period RSI goes up three days in a row.
3. On the first day of the 3-day drop, the RSI value is already > 60.
4. The 2-period RSI of the current day closes > 10.
This example shows two buy signals on Microsoft stock. The market price is above the blue line, which represents the 200-day moving average in the chart. The RSI was below 60 when it started dropping for three consecutive days. After the RSI dropped below 10, a buy signal was triggered.
When to close a position
The R3 strategy does not use a profit target order and a stop loss order. Larry Connors again uses the 2-period RSI to determine when to close the position:
A long position is closed when the 2-period RSI closes > 70.
A short sell position is closed when the 2-period RSI closes < 30.
This example shows a buy signal on Visa stock. The position was automatically closed 2 days later, when the RSI closed above 70.
Is the R3 strategy profitable
The R3 strategy makes a very good impression based on back-tests. In particular Larry Connors’ claim that the strategy has a high number of winning trades seems to be correct.
These examples show back-tests of the Larry Williams Volatility Break-out strategy over several years. The profits are variable but none are negative.
In NanoTrader follow these steps:
1. Open the chart of the instrument you want to trade.
2. In the WHS Strategies folder, select the "WHS R3" strategy.
3. Adapt the settings if required.
4. Semi-automated trading? Activate TradeGuard+AutoOrder. Automated trading? Activate AutoOrder.