2-Period RSI Strategy - Technical Guide

Plots a 2-period RSI with color-coded signals based on SMA(5), SMA(200) and oversold/overbought thresholds.

Overview

This indicator implements the Larry Connors 2-Period RSI mean-reversion strategy. It computes a 2-period RSI and two simple moving averages (5 and 200 periods). The RSI line is colored to highlight potential buy and sell setups: lime when the market is above the 200 SMA, below the 5 SMA, and the RSI is below 10 (oversold); red when below the 200 SMA, above the 5 SMA, and the RSI is above 90 (overbought). Otherwise the line is silver.

The indicator is designed for short-term mean-reversion trading. It draws fixed horizontal levels at 100, 90, 10, and 0, and a semi-transparent band between 10 and 90 to visually mark the oversold/overbought zones. The colored RSI line helps traders quickly identify when the conditions for a potential reversal are met.

How it works

1. Compute the 2-period RSI from the current close price.
2. Compute the 5-period simple moving average (SMA) of close.
3. Compute the 200-period simple moving average (SMA) of close.
4. Check if close is above the 200 SMA and below the 5 SMA and RSI < 10; if true, set line color to lime.
5. Else check if close is below the 200 SMA and above the 5 SMA and RSI > 90; if true, set line color to red.
6. Otherwise set line color to silver.
7. Plot the RSI value as a line with the determined color.
8. Draw fixed levels at 100, 90, 10, 0 and a band between 10 and 90.

Mathematical model

The indicator uses standard RSI and SMA formulas:

where average gain and average loss are computed over the last 2 periods using Wilder’s smoothing.

with $n=5$ and $n=200$.

Logic flow

flowchart TD
    A["Start each bar"] --> B["Compute RSI(2), SMA(5), SMA(200)"]
    B --> C{"close > ma200 AND close < ma5 AND rsi < 10?"}
    C -- Yes --> D["Set color = LIME"]
    C -- No --> E{"close < ma200 AND close > ma5 AND rsi > 90?"}
    E -- Yes --> F["Set color = RED"]
    E -- No --> G["Set color = SILVER"]
    D --> H["Plot RSI line with color"]
    F --> H
    G --> H
    H --> I["Draw levels and band"]

Code walkthrough

Decorators and UI setup

Lines 13-19 of 2-Period RSI Strategy.indie5:

@indicator('RSI-2')
@plot.line(line_width=4, title='RSI', id='#plot_0')
@level(100, line_width=3, line_color=color.AQUA, line_style=line_style.SOLID, title='Upper Line 100')
@level(0, line_width=3, line_color=color.AQUA, line_style=line_style.SOLID, title='Lower Line 0')
@level(90, line_width=3, line_color=color.AQUA, line_style=line_style.SOLID, title='Upper Line 90')
@level(10, line_width=3, line_color=color.AQUA, line_style=line_style.SOLID, title='Lower Line 10')
@band(10, 90, fill_color=color.SILVER(0.1))

The @indicator decorator sets the indicator name to ‘RSI-2’. The @plot.line decorator defines the main plot line with width 4 and title ‘RSI’. The @level decorators draw horizontal lines at 100, 0, 90, and 10 with aqua color and solid style. The @band decorator fills the area between 10 and 90 with a semi-transparent silver fill. These decorators automatically generate the settings UI in the platform.

Computing the indicators

Lines 21-24 of 2-Period RSI Strategy.indie5:

    rsi = Rsi.new(self.close, 2)[0]

    ma5 = Sma.new(self.close, 5)[0]
    ma200 = Sma.new(self.close, 200)[0]

The RSI with period 2 is computed using Rsi.new(self.close, 2)[0]. The SMA with period 5 and 200 are computed similarly. The [0] index retrieves the current bar’s value from the series returned by .new(). These values are used later in the color logic.

Color logic for buy/sell signals

Lines 26-30 of 2-Period RSI Strategy.indie5:

    col = color.SILVER
    if self.close[0] > ma200 and self.close[0] < ma5 and rsi < 10:
        col = color.LIME
    elif self.close[0] < ma200 and self.close[0] > ma5 and rsi > 90:
        col = color.RED

The variable col is initially set to color.SILVER. The first condition checks for a long setup: close above 200 SMA, close below 5 SMA, and RSI below 10. If true, the color becomes LIME. The second condition checks for a short setup: close below 200 SMA, close above 5 SMA, and RSI above 90. If true, the color becomes RED. Otherwise, the default silver is used.

Returning the plot

Lines 32-32 of 2-Period RSI Strategy.indie5:

    return plot.Line(rsi, color=col)

The function returns a plot.Line tuple containing the RSI value and the computed color. This single line is the only output drawn on the chart. The levels and band are drawn automatically by the decorators.

Reading the chart

• The RSI line is colored lime when all three conditions for a long setup are met: price above the 200-period SMA, price below the 5-period SMA, and RSI below 10 (deeply oversold). This suggests a potential mean-reversion buy.
• The line is colored red when conditions for a short setup are met: price below the 200-period SMA, price above the 5-period SMA, and RSI above 90 (extremely overbought). This suggests a potential mean-reversion sell.
• Otherwise the line is silver, indicating no clear signal.
• The aqua horizontal levels at 100 and 0 mark the RSI extremes; levels at 90 and 10 highlight the overbought/oversold thresholds used in the strategy.
• The silver band between 10 and 90 visually emphasizes the normal RSI range; signals occur only when the RSI exits this band.

Implementation notes

• The RSI(2) is extremely sensitive and can produce frequent whipsaws; it is designed for very short-term mean-reversion.
• The SMA(200) may not be available on charts with fewer than 200 bars; in that case the condition using ma200 will be false and the line will remain silver.
• The indicator does not repaint because it uses only the current bar’s close and RSI value; all calculations are based on the current bar’s data.
• The color logic uses strict inequalities; if any of the conditions are not met (e.g., RSI exactly 10 or 90), the line stays silver.

FAQ

How can I change the RSI period or the moving average lengths?

Modify the numeric arguments in lines 21, 23, and 24. For example, change Rsi.new(self.close, 2) to Rsi.new(self.close, 5) for a 5-period RSI, and adjust the SMA periods accordingly.

Can I adjust the overbought/oversold thresholds (10 and 90)?

Yes, edit the @level decorators on lines 17 and 18 to change the displayed levels, and update the hardcoded values in the conditions on lines 27 and 29 (e.g., change rsi < 10 to rsi < 20).

What does the lime and red coloring mean exactly?

Lime indicates a potential long entry: price above the 200 SMA, below the 5 SMA, and RSI below 10. Red indicates a potential short entry: price below the 200 SMA, above the 5 SMA, and RSI above 90. These are mean-reversion signals based on Larry Connors’ strategy.

Full source code

Indie Script v5, as published on TakeProfit. Copy it into the platform’s script editor or open the live script.

# Ported to Indie from https://www.tradingview.com/script/xOm7jSPf-CM-RSI-2-Strategy-Lower-Indicator/ created by @ChrisMoody
# Based on Larry Connors RSI-2 Strategy - Lower RSI

# This Source Code Form is subject to the terms of the Mozilla Public License, v. 2.0.  
# If a copy of the MPL was not distributed with this file, you can obtain one at  
# <https://mozilla.org/MPL/2.0/>.

# indie:lang_version = 5
from indie import indicator, color, plot, level, band, line_style
from indie.algorithms import Rsi, Sma


@indicator('RSI-2')
@plot.line(line_width=4, title='RSI', id='#plot_0')
@level(100, line_width=3, line_color=color.AQUA, line_style=line_style.SOLID, title='Upper Line 100')
@level(0, line_width=3, line_color=color.AQUA, line_style=line_style.SOLID, title='Lower Line 0')
@level(90, line_width=3, line_color=color.AQUA, line_style=line_style.SOLID, title='Upper Line 90')
@level(10, line_width=3, line_color=color.AQUA, line_style=line_style.SOLID, title='Lower Line 10')
@band(10, 90, fill_color=color.SILVER(0.1))
def Main(self):
    rsi = Rsi.new(self.close, 2)[0]

    ma5 = Sma.new(self.close, 5)[0]
    ma200 = Sma.new(self.close, 200)[0]

    col = color.SILVER
    if self.close[0] > ma200 and self.close[0] < ma5 and rsi < 10:
        col = color.LIME
    elif self.close[0] < ma200 and self.close[0] > ma5 and rsi > 90:
        col = color.RED
    
    return plot.Line(rsi, color=col)