TPS Trading Strategy: Backtest And Example

Many traders often think that mean-reversion strategies are only meant for range-bound markets. But that’s not the case, as there are strategies that can be traded in a trending market. A good example is the TPS trading strategy. What is it?

The TPS (Trend, Pullback, and Signal) trading strategy, also known as the Time/Price Scale-in strategy or the 2-period RSI strategy, is a strategy developed by Larry Connors, a well-known trader and author. It is a mean-reversion strategy that is designed to take advantage of the momentum in the market by entering trades on pullbacks in the direction of the trend.

In this post, we answer some questions about the TPS trading strategy and end the article with a backtest.

Introduction to TPS Trading Strategy

The TPS (Trend, Pullback, and Signal) trading strategy, also known as the Time/Price Scale-in strategy or the 2-period RSI strategy, is a strategy developed by Larry Connors, a well-known trader and author. The strategy is based on the idea of combining trend-following indicators with momentum indicators to identify entry and exit points in the market.

The trend is identified using the 200-period moving average, while the pullback is identified using the Connors RSI, a custom RSI indicator developed by Connors. The signal is generated using a 2-period RSI.

The strategy is designed to take advantage of the momentum in the market by entering trades on pullbacks in the direction of the trend. The idea is that the pullback will provide an opportunity to enter a trade at a better price and with a higher probability of success. The strategy is used for short-term trading on various markets such as stocks, ETFs, and futures.

Benefits of TPS Trading Strategy

  • It takes advantage of momentum in the market by entering trades on pullbacks in the direction of the trend.
  • It uses trend-following indicators and momentum indicators to identify entry and exit points, increasing the probability of success.
  • It provides a way to scale in a position by adding to the position gradually over time, reducing risk.
  • It is suitable for short-term trading on various markets such as stocks, ETFs, and futures.
  • It is flexible and can be customized to suit the individual trader’s risk tolerance and trading style.
  • It provides a clear set of rules to follow, making it easy to implement and follow.
  • It emphasizes the importance of proper risk management and not over-committing on any single trade.

Important Considerations for TPS Trading

Some of the important factors to consider when using the TPS trading strategy include:

  • The direction of the trend
  • What defines an overbought/oversold region in 2-period RSI
  • The position size to trade
  • How to scale in
  • The exit signals

Steps to Implement TPS Trading Strategy

Here are the steps for implementing the TPS trading strategy:

  1. Identify the trend: The stock must be trading above the 200-day Exponential Moving Average (EMA) to confirm that the trend is up.
  2. Wait for an oversold signal: The 2-period Relative Strength Index (RSI) must be below 25 for two consecutive days, indicating that the stock is oversold.
  3. Enter a trade: On the second day of the oversold signal, buy 10% of your position at the closing price.
  4. Scale in on pullbacks: If the stock price closes lower than your previous entry price on the third, fourth, and fifth days, add 20%, 30%, and 40% more of your position, respectively.
  5. Exit the trade: When the 2-period RSI reaches overbought territory (above 70), exit the trade at the closing price of that day.

Risk Management for TPS Trading

To manage risk when using the TPS strategy, do these:

  • Use a trailing stop-loss to exit the trade.
  • Use proper position sizing to not over-commit on any single trade.
  • Scale in a position gradually over time to reduce risk.
  • Use ot