RSI Indicator: The Cornerstone of Andrew Cardwell’s
Trading Model
The ideal technical indicator, according to Andrew Cardwell, Jr., is one that
offers capability to identify and monitor the current trend, highlight
aoverbought and oversold extremes, and give early warnings of a trend
change.
“The Relative Strength Index (RSI) is such an indicator, offering the best of
all worlds,” said Cardwell, president of Cardwell Financial Group, Inc.,
based in Woodstock, Ga. The RSI “is the cornerstone of my trading model,”
he said.
Cardwell is a featured speaker at this weekend’s 20th annual Telerate
Seminars Technical Analysis Group (TAG 20) conference here.
“In the lectures and workshops I have given, I have shown how the RSI can
be used as either a completely independent trading model or an addition to
and enhancement of a trader’s current technical approach. I use it as a
completely independent model to identify trend, support and resistance,
overbought/oversold levels, divergence, trend change, reversal and price
targeting.”
Cardwell said most traders who use the RSI focus their attention on trying
to identify bullish and bearish divergences. He said basic price and
momentum divergence can and does help to identify extreme overbought
or oversold conditions in market momentum.
“However, most traders fall prey to the concept of divergence and see it as
the end or reversal of the prevailing trend of the market. All would be right
in the world if markets were to reverse from simple divergence. But there
are times when sentiment and momentum are so strong that the market
continues to make new highs (or lows), which will keep the RSI at
overbought (or oversold) levels for extended periods of time.
“Momentum and price corrections, when they do materialize, are usually
sharp and swift. After these brief respites the market is then ready to
resume its normal upward (downward) trend. With each successive new
high (low) and divergence formed, anxious traders are ready to call for a
top (bottom) and reversal of trend. However, in strongly trending markets,
multiple divergences can and do develop, which only lead to corrections of
the overbought (oversold) condition of the market.
“If a trader attempted to take positions based solely on divergences, he or
she would need deep pockets and eventually exhaust his or her trading
capital,” said Cardwell.
While Cardwell takes note of divergence, he said that only shows the
market is overextended and needs to correct the overbought or oversold
condition. Even though the RSI is considered a momentum oscillator, he
said it has more values as a trend-following indicator.
“One of the guidelines I have established for myself is to identify a range for
uptrends as well as downtrends. As the market trends higher or lower I will
adjust the normal range of RSI (70-30) to account for the shift in market
momentum and bullish or bearish sentiment on the part of the traders. The
fact that this adjustment needs to be made in the range of RSI is one of the
first indications that the market is undergoing a trend change.”
The ability of a trader to recognize a trend change quickly, reverse a
position and trade in the direction of that next trend is the skill that traders
must develop to be successful, said Cardwell. “By having a position in tune
with the trend, the trader will have the opportunity to participate in the
bigger market moves, which generate larger profits.”
