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Short Term Trading Strategies That Work

by Larry Connors and Cesar Alvarez (2010)

Quick summary -- an in-depth PhD-level extended summary (10-30 pages) for this book is coming soon.

Short Term Trading Strategies That Work

Author: Larry Connors and Cesar Alvarez | Categories: Day Trading, Swing Trading, Trading Systems, Mean Reversion

Executive Summary

"Short Term Trading Strategies That Work" by Larry Connors and Cesar Alvarez, published in 2009, is a data-driven guide to short-term trading strategies backed by extensive quantitative research. Connors, founder of the Connors Group and TradingMarkets.com, and Alvarez, a quantitative researcher, present a series of statistically validated strategies that challenge conventional trading wisdom, particularly the tendency to buy breakouts.

The book's approach is refreshingly empirical: every claim is backed by historical data analysis across thousands of data points. The strategies presented are primarily mean-reversion in nature, built on the principle that markets tend to revert to their mean after extended moves. The book is structured around a series of "rules" that build upon each other into a complete short-term trading methodology.

Core Thesis & Arguments

The central thesis is that short-term markets exhibit strong mean-reversion tendencies, and traders should buy pullbacks in uptrends rather than buying breakouts. Connors and Alvarez present data showing that buying after pullbacks produces significantly better returns than buying after new highs. This directly contradicts the breakout-buying approach advocated by many technical analysts. Their second key argument is that markets historically have a bullish bias, and strategies should be designed to exploit this.

Chapter-by-Chapter Analysis

Rule 1: Buy Pullbacks, Not Breakouts

Extensive data showing that buying at new highs produces inferior returns compared to buying after pullbacks in established uptrends.

Rule 2: Buy After the Market Has Dropped

Statistical evidence that market declines (measured by consecutive down days or distance from moving averages) predict short-term bounces.

Rules 3-7: Specific Strategy Rules

Covers the 200-day moving average as a trend filter, using VIX for timing, the 2-period RSI strategy, cumulative RSI strategies, and specific exit techniques.

The TPS Strategy

A complete, rule-based strategy combining the trend filter (200-day MA), pullback identification (2-period RSI), and specific entry/exit rules.

Key Concepts & Frameworks

  • Mean Reversion: The tendency of prices to return to their average after short-term deviations.
  • 2-Period RSI: Using a very short RSI lookback as an overbought/oversold indicator for short-term timing.
  • 200-Day Moving Average Filter: Trading only in the direction of the long-term trend as defined by the 200-day MA.
  • Cumulative RSI: Summing RSI values over multiple periods for more refined entry timing.
  • VIX as a Timing Indicator: Using elevated VIX readings to identify short-term buying opportunities.

Practical Trading Applications

  1. Use the 200-day moving average as a primary trend filter -- only buy when price is above it.
  2. Buy when the 2-period RSI drops below 10 (deeply oversold on a short-term basis).
  3. Exit positions when the 2-period RSI rises above 70 or 80.
  4. Buy after multiple consecutive down days rather than after up days.
  5. Use elevated VIX readings as a contrarian signal for short-term long entries.

Critical Assessment

Strengths: Completely data-driven approach. Challenges conventional wisdom with evidence. Strategies are simple, rule-based, and testable. Short, focused book without filler.

Weaknesses: All strategies are optimized on historical data and may not work in all market regimes. Focus is almost exclusively on long-side mean reversion. Transaction costs and slippage may erode theoretical returns.

Best for: Short-term traders who appreciate quantitative, evidence-based strategies and want to implement systematic mean-reversion approaches.

Key Quotes

"Our research shows that buying pullbacks is far more profitable than buying breakouts."

"Markets that have been going down tend to go up, and markets that have been going up tend to continue going up."

Conclusion & Recommendation

"Short Term Trading Strategies That Work" is a valuable, no-nonsense guide for data-driven short-term traders. Its greatest contribution is providing statistical evidence for mean-reversion strategies while debunking the breakout-buying mythology. The strategies are simple enough to implement immediately and provide a solid foundation for quantitative short-term trading.