What Is Connors RSI: Indicator for Short-term Trades
- Connors RSI (CRSI) is a momentum oscillator helpful in identifying overbought and oversold conditions in shorter trading timeframes.
- In comparison with the RSI, CRSI is more volatile and faster-moving and requires more extreme levels to be set. In comparison with the while the Stochastic RSI, that works better in sideways or choppy markets, CRSI suits short-term trading better.
- The CRSI indicator is a free indicator available on Phemex and it should be used along with other indicators and analysis techniques for successful trading.
What Is Connors RSI Indicator?
Connors RSI (CRSI) is a momentum oscillator developed by Larry Connors and its team at Connors Research. It’s used to identify overbought and oversold conditions in shorter trading timeframes. The conventional 14-period Relative Strength Index (RSI) created by Welles Wilder is deemed to be reacting too slowly, which hinders its usefulness in short-term trading. In light of this drawback, Connors Research sought to improve this indicator by making it more suitable for shorter timeframes.
Connors and his teammates initially developed a variation of RSI, which applied a 2-period RSI and moved overbought/oversold levels out to 90 and 10. Yet, this indicator still generated more false signals than desired. With continuous efforts, the team subsequently developed a brand-new composite indicator called the CRSI indicator.
CRSI line of the BTC/USDT pair. (Source: Phemex)
What are Connors RSI Components?
Connors RSI (CRSI) combines the momentum measurement of RSI with the Up/Down Streak Length that measures the duration of the trend, and the Rate-of-Change that gauges the magnitude of the price change, to create a more usable short-term RSI indicator.
- RSI: The first component is a simple 3-period RSI of price, and it measures the price momentum on a scale of 0-100.
- Up/Down Streak Length: The second component is a 2-period RSI of the up/down streak length that gauges the duration of the trend. The up/down streak is the number of days in a row that the crypto’s closing price has been higher (up) or lower (down) than its previous close. If a crypto closes above its previous close three days in a row, then the up/down streak will be +3. If the price closes below its previous close for two days, the streak will be -2. If the price does not change between one period and the next, the streak will be 0. These streak values will then be converted to a bound oscillator by applying the 2-period RSI to them. The new values will be in the range of 0-100.
- Rate-of-Change: The third component ranks the most current period’s price change against the price change of the other periods in a specified timeframe. Usually, it is set to be 100 periods by default. The core of this component is that it determines the percentage of previous price changes that are lower than the most recent one. For instance, assume you specify a 20-day timeframe. If 7 of those 20 values of price change are lower than today’s price change, then the rate-of-change will be 7/20 = 0.35 = 35%. Also, you should note that defining this as a percentage turns the component to a scale of 0-100. Therefore, if today’s price change is significant and positive, the value will get close to 100; otherwise, it will result in a value closer to 0.
What is Connors RSI Formula?
Once the three components of Connors RSI have been calculated, they will all add up and be divided by 3. The formula is as follows:
CRSI(3,2,100) = [ RSI(3) + RSI(UpDown Length,2) + ROC(100) ] / 3
The outcome of the calculation ranges between 0 and 100. Also, Connors recommends parameters of 3,2 and 100 for each component, respectively, but these parameters can always be adjusted to suit your trading needs.
How to Interpret Connors RSI?
The CRSI indicator is generally used to identify overbought and oversold conditions in shorter trading timeframes.
Dissimilar to the conventional RSI that typically defines 70 and 30 as the overbought and oversold levels, CRSI is more volatile and faster-moving and requires more extreme levels to be set. Connors recommends using 90 and 10 for overbought and oversold levels, but these can be adjusted to meet your trading needs. For more volatile cryptos, 95 and 5 are used occasionally.
Just like other overbought/oversold indicators, a buying opportunity emerges when a crypto falls below the oversold threshold, while a crypto rising above the overbought threshold indicates a potential pullback in the future.
Connors RSI vs. Stochastic RSI
The Stochastic RSI indicator provides a stochastic calculation of the RSI of a crypto. It measures the RSI relative to the crypto’s low and high range within a specified period. Stochastic RSI works on the assumption that prices tend to move closer to their high points during uptrends and to their low points during downtrends.
Connors RSI and Stochastic RSI with the BTC/USDT pair. (Source: Phemex)
Stochastic RSI suggests traders set overbought/oversold levels at 80 and 20 instead of 90 and 10 used by CRSI and 70 and 30 used by the traditional RSI. It generally comprises two lines: the %K (blue) line represents the number of RSI periods used to calculate the Stochastic, while the %D (red) line reflects the three-day simple moving average of the %K line.
As the price tends to follow the momentum, the intersection of these two lines signals that a reversal may happen because it indicates a large shift in momentum from one day to another. In addition, divergences between the Stochastic RSI and the trending price movement are seen as a vital reversal signal as well.
According to the guidelines, traders should go long when the Stochastic RSI drops to anywhere below the oversold level and then recovers above it. In the meantime, traders should go short when the indicator rises above the overbought level and then crosses below it. These are pretty similar to CRSI’s principles.
Generally speaking, CRSI suits short-term trading better, while the Stochastic RSI works better in sideways or choppy markets. This is because CRSI is an enhancement to the traditional RSI for shorter-term trades. It normally generates fewer yet more accurate trading signals than the latter. On the other hand, the Stochastic RSI uses the closing prices along with the highs and lows of the current trading range to examine when a price hits the high or low. This is why the choppy markets suit the Stochastic RSI better.
Connors RSI (CRSI) Strategy in Crypto Trading
Step 1: Identify the market context
The first step is to always learn the price movement and then determine trends. A crypto may be oversold when the CRSI line goes below 10, and an uptrend may happen. In contrast, when the line gets near 90 or above, it indicates a possible overbought condition on the crypto and the approaching of a downtrend. Traders regularly use CRSI to identify the best short-term trading positions in shorter timeframes.
Step 2: Combine other indicators with CRSI
CRSI tends to generate false signals; hence technical traders concurrently refer to other indicators to determine trading positions. For example, you may use an exponential moving average (EMA) crossover with CRSI.
Suppose you use EMA 10 (red) and EMA 20 (green) lines on your chart. A potential selling signal emerges when: first, the CRSI line reaches the overbought level; second, the EMA 10-line crosses the EMA 20-line on the downside. A potential buying signal emerges when the indicators show the exact opposite condition. You can use candlestick patterns or other indicators to combine with CRSI as well.
Step 3: Use multi-timeframe analysis
We already know that CRSI caters to the need for short-term trades. Thus, using a multi-timeframe analysis will help us make constant trading positions. For example, possible trading opportunities emerge when the price touches the support and resistance levels on the daily chart.
You can look for many buy/sell positions during the consolidating phase using a 5-min or 15-min chart by referring to the support and resistance levels besides CRSI readings.
Potential buy/sell positions of Solana (SOL) in a 15-min chart. (Source: Phemex)
In addition, a multi-timeframe analysis allows a bird-eye view of the crypto’s price. This will decrease risky trades and increase returns as it’s less likely that you will open a position against the trend or institutes.
Step 4: Try to include fundamental data in the analysis
Traders make a decision based on not only the technical analysis but also fundamental context. This is because technical indicators often fail to predict the crypto’s future price movement that is attributed to fundamental events.
For instance, any interest rate decision by the Federal Reserve, adoption or regulations on cryptocurrencies by any government, and wars like the Russia-Ukraine war can alter the original price movement and make the market volatile within a day.
How to Use Connors RSI?
Let’s use Phemex platform for this demonstration. The CRSI indicator is a free indicator available to all Phemex users under all trading pairs. To use CRSI on Phemex, open your favorite trading pair. We will use the most traded BTC/USDT pair for this tutorial. At the time of writing, BTC trades at $39,559.40.
Click on “Indicators” at the top of the chart, and a new window will pop up. Type “CRSI” in the search bar and find the indicator.
Click on the indicator, and the CRSI line will appear. We use the 15-min chart for the CRSI indicator as we already learned that this indicator suits the short-term trades and lower timeframes the best. You may change the chart’s timeframe, and the indicator will adjust accordingly. However, you’re discouraged from using this indicator in higher timeframes. Below is what the Connors RSI line looks like on the 15-min BTC/USDT chart.
While Connors recommends using 90 and 10 for overbought and oversold levels, Phemex uses 70 and 30 by default. However, you can always adjust the numbers according to your trading needs.
This is how the Connors RSI indicator looks on the 5-min chart.
To adjust the parameter of the variables, traders can click on the “CRSI (3, 2, 100)” bar on the top left above the CRSI readings and go to “Settings.” A settings bar will pop up where traders can input custom numbers that suit their needs.
5 Steps on Trading with Connors RSI
- Choose a trading pair, such as BTC/USDT, BNB/USDT, or SOL/USDT.
- Select the timeframe that you want. For CRSI, kindly use lower timeframes, like the 5-min or 15-min chart.
- Click on “Indicators,” and then type “CRSI.” Next, click on the indicator to activate it.
- You may adjust the parameter of the variables in the settings.
- Plan your trading strategy according to the readings and other indicators.
CRSI combines the momentum measurement of RSI with the Up/Down Streak Length that measures the duration of the trend, and the Rate-of-Change that gauges the magnitude of the price change, to create a more usable short-term RSI indicator. This is because the conventional RSI repeatedly reaches extreme overbought and oversold levels in lower timeframes, which implies a higher percentage of false signals. Though short-term traders face a more volatile market, CRSI is generally useful as it generates fewer trading signals than the traditional RSI, reducing the possibility of false signals. However, as with all indicators, traders should use CRSI along with other indicators and analysis techniques to boost the success rate in trade.