Connors RSI is an indicator that combines several key technical components to create a momentum oscillator that can be used to spot overbought and oversold conditions for a stock or index. There are three components that are utilized in this indicator – price momentum, trend duration and the relative magnitude of price change. The values of these three components are then averaged, and the result is plotted on a scale of 0 to 100. High values indicate a bias toward lower prices over the next several days, while low values indicate a bias toward higher prices over the next several days.
Whereas an indicator such as RSI (Wilders) shows favorable test results using a very short look-back period such as two, three or four days, it's prone to giving signals that are premature at times. This is true for both buy and sell signals. By comparison, Connors RSI has incorporated the additional features that measure how stretched the price has become before registering a potentially actionable signal. As with most oscillators, you may achieve better results when using the indicator to buy short-term pullbacks in an overall uptrend and to sell short-term rallies in an overall downtrend.
Whether using the standard RSI or the Connors RSI indicator, it should be noted that Connors Research has tested a number of entry techniques for many of their strategies. Connors research generally achieved their best results when they used scale-in entry techniques. Based on their findings, these scale-in entries may help the trader experience improved results while more effectively managing risk.
The analytical tools described in this article are for information purposes only and their use does not guarantee a profit. None of the information provided should be considered a recommendation or solicitation to invest in, or liquidate, a particular security or type of security. Investors should fully research any security before making an investment decision.