The RSI 2 strategy buys weakness rather than strength. The relative strength index measured over just two sessions swings from near 100 to near 0 within a few days, so a reading of 5 or lower means the last two or three closes were almost all down, often sharply. In a stock that is still above its 200-day average, such a dip has often been followed by a partial rebound within days, and the strategy aims to capture only that rebound: it sells on the first close above the 5-day simple moving average.
Larry Connors and Cesar Alvarez published the method in Short Term Trading Strategies That Work (2008), with the 200-day average as the trend filter, RSI(2) readings of 5 or 10 as the entry and a close above the 5-day average as the exit. Their rules use no stop. Clear Tape keeps the entry and the exit and adds two limits so that every trade has a defined risk: a disaster stop three ATRs below the entry, and a time stop that sells at the close of the 10th session if the trade is still open.
This is a different kind of trade from the breakout and trend strategies on this site. It expects no new trend, holds for days rather than weeks, and its gains are usually small, with occasional losses several times larger than a typical gain. The RSI article explains how the indicator is calculated; the Academy lesson on short-term mean reversion covers why dips in uptrends tend to snap back and why stops behave differently in this kind of trade.
The exact rules
These are the rules the RSI-2 Dip in Uptrend preset runs in Clear Tape, checked on daily bars after each close. This page and the software read the same rulebook, so they always agree.
Entry
- The close is above the 200-day SMA.
- RSI(2) at the close is 5 or lower. Buy at that close.
Stop
- A disaster stop at entry − 3 × ATR(14), set on the entry day. The published rules use no stop; this one is shown so the risk is visible.
Exit
- A close above the 5-day SMA; sell at that close.
- Time stop: if neither the exit nor the stop has come by the 10th session after entry, sell at that close.
Target
- The 5-day SMA on the entry day: roughly where the exit rule aims. It is shown for reference; the exit rule closes the trade.
Parameters
| Parameter | Value |
|---|---|
| RSI length | 2 |
| Entry level | RSI(2) ≤ 5 |
| Trend filter | close > SMA 200 |
| Exit average | SMA 5 |
| Disaster stop | 3 × ATR(14) |
| Time stop | 10 sessions |
| Minimum history | 220 sessions |
Data it needs
- Daily bars (open, high, low, close), split-adjusted: at least 220 sessions, about 10 months.
Where it differs from the published method
- The published rules use no stop and no time limit; both are added here so every trade has a defined risk.
- A looser threshold of 10 gives more signals with weaker results; this preset uses 5.
Terms used
- RSI (relative strength index): A 0–100 gauge of recent up moves against recent down moves (Wilder's method). RSI(n) near 0 means the last few closes were almost all lower; near 100, almost all higher. It is not the stock's strength against the market.
- SMA (simple moving average): The plain average of the last n closing prices, today included. "The 50-day SMA" averages the last 50 closes.
- ATR (average true range): A stock's typical daily move. Each day's true range is the largest of high − low and the distances from the previous close to the high and to the low (so gaps count); ATR(n) averages it Wilder's way (each new day counts 1/n). A stop set in ATRs sits farther away on a jumpy stock.
Who it suits
Traders who cannot watch the session but can run a short routine each evening, and who prefer shorter, more frequent trades. Gap risk must be accepted.
The strategy suits traders who can check a list of stocks after each close and act the same evening, and who are comfortable buying a stock that has just fallen for several days. Trades are short, typically a few sessions, so signals are relatively frequent across a broad watchlist and capital turns over quickly.
Its profile demands discipline in two places. Gains per trade are small, so commissions and slippage take a large share of them; run your own figures in the trading cost calculator. And the stop is wide by design, so position size must come from the disaster-stop distance: a full 3-ATR loss should cost no more than the share of the account you planned to risk. In broad sell-offs many stocks signal on the same day and their outcomes move together, so many traders cap how many positions they open at once.
Strengths
- Pullbacks give a lower entry price and an obvious place for the stop.
- Decided once a day after the close; no need to watch the session.
- Two families cover trending markets and choppy markets in a long uptrend.
- Mean-reversion trades exit on strength, typically within two to six sessions.
Weaknesses
- Overnight and earnings gaps can turn a planned 1R loss into 2R or 3R.
- Mean reversion: small gains, with occasional losses several times larger.
- Thin average gains make results sensitive to trading costs.
- Depends on the market: trend entries lose in ranges, dip buys in declines.
Where it struggles: Crashes and trend breaks (catching a falling knife). Most trades win, but the average loss is larger than the average win.
Common mistakes
- Removing the trend filter. A 2-period RSI near zero in a stock below its 200-day average is often the early part of a longer decline, not a dip to buy.
- Holding for a bigger move. The exit is the first close above the 5-day SMA. Staying in for a new high turns a short mean-reversion trade into a different strategy, without the reason that justified the entry.
- Using a tight stop. A stop just under the entry tends to be hit at the low of the dip, right before the rebound the strategy is waiting for. The disaster stop is wide on purpose; control risk through position size instead.
- Loosening the threshold to get more trades. A level of 10 instead of 5 produces more signals from shallower dips; this preset uses 5. Change it only after testing both.
- Ignoring the time stop. A trade that neither rebounds nor fails within 10 sessions ties up capital in a position whose expected bounce has not come. The rule sells it at the 10th session's close.
- Buying a fall on earnings or company news. A sharp drop on a report or a damaging headline is not the kind of short, liquidity-driven dip the method expects; check why the stock fell.
Worked example
Illustrative numbers only. A stock trading above its 200-day SMA of $70 falls for three sessions and closes at $80.00, where RSI(2) reads 3.8, below 5. The strategy buys at $80.00. ATR(14) is $2.00, so the disaster stop is $80.00 − 3 × $2.00 = $74.00, a risk of $6.00 per share. The 5-day SMA on the entry day, $83.00, is shown as the reference target.
With a $25,000 account and 1% risk ($250), the position is $250 ÷ $6.00 ≈ 41 shares, about $3,280. Two sessions later the stock closes at $82.40, above that day's 5-day SMA of $81.90, and the position is sold at that close: $2.40 a share, about $98, or 0.4R before costs. Had it drifted without bouncing, the time stop would have sold it at the 10th session's close, for example at $78.50, a loss of about $62. Had it collapsed through $74.00, the loss would have been about $246, or 1R, and more if the price gapped below the stop.
Learn and practice
Academy lessons
Calculators and guides
- RSI: how the Relative Strength Index works
- Stop-loss placement: where to put a stop
- ATR stops: setting stops by volatility
- Position size calculator
- Trading cost calculator
- Backtesting: method and common biases
Glossary terms
- Mean reversion
- Relative Strength Index (RSI)
- Moving average
- Average true range (ATR)
- Time stop
- R multiple
Using it in Clear Tape
- Free Turn on the RSI-2 Dip in Uptrend preset in Trading systems. The rules are written out in full, and you can build your own systems from them (Free: up to 5 systems and a 50-stock watchlist).
- Tools After every close, RSI-2 Dip in Uptrend screens your watchlist and lists its signals, with the entry, the stop and the target drawn on the chart.
- Free Check against my system: every rule of RSI-2 Dip in Uptrend on any stock's daily bars, the levels it sets and the caveats (earnings close by, thin trading, gaps wider than the stop), with a short AI-written explanation of those facts. One check a day on Free as a trial, 10 on Tools, 30 on Pro.
- Tools Backtest RSI-2 Dip in Uptrend with the two-period test: judged on 2000–2014, then run unchanged from 2015 to now against holding the same stocks, with your own costs and risk per trade (Tools 20 backtests a day, Pro 50). Results are hypothetical: each report discloses costs and survivorship bias, and past results do not predict future ones.
- Free Log the trades in the free trade journal, tagged with the system: R multiples, expectancy and an AI score of how closely each trade followed the plan.
- Pro The AI coach proposes rules from the way you actually trade (Pro, 5 conversations a month).
For educational purposes only. Not investment advice. Backtest results are hypothetical and do not predict future results.