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Strategy Playbooks
Mean Reversion · Beginner

RSI(2) Mean Reversion

Buy short, sharp selloffs inside a long-term uptrend.

Backtest this playbook
Origin: Larry Connors and Cesar Alvarez, Short Term Trading Strategies That Work (2008)
Session
Daily close
Timeframes
1d
Markets
SPY, QQQ, Index ETFs
Reward
High win rate, small average winner
Illustration
550.0560.0570.0RSI(2) < 10Long 559.8Exit 562.4105070RSI (2)
Daily sketch with RSI(2) below. Two sharp down days push RSI(2) from 58 to 5 inside the uptrend, and the long fills at the next open (559.8). Price dips for two more sessions — normal heat for this model — then RSI(2) closes above 70 and the position exits at 562.4 the next morning.

Why it works

Equity indices in long-term uptrends tend to bounce after short, violent declines. A 2-period RSI is extremely sensitive: readings below 10 flag oversold extremes. The edge comes from the trend filter and the quick exit, not from the indicator alone.

The rules

01Setup

  • Trend filter: the close is above the 200-day simple moving average.

02Entry

  • Buy at the next open when RSI(2) closes below 10.

03Stop

  • A wide disaster stop at 3× ATR. This model relies on its exit rule, not a tight stop.

04Target

  • Exit at the next open after RSI(2) closes above 70, or after price closes above its 5-day average.

05Management

  • Expect occasional large losers in crashes. Keep position size modest.

06Invalidation

  • A close below the 200-day average switches the model off — no new entries.

Common mistakes

  • Running it in bear markets without the 200-day filter
  • Tightening the stop until normal noise hits it
  • Applying it to single stocks with earnings gaps

Educational material, not financial advice. The illustration is a sketch of the rules, not a historical trade. Results in the backtester are hypothetical and do not guarantee future performance.