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RSI
Indicator "Cornerstone" of Andrew Cardwell's
Trading Model
By
Jim Wyckoff
The
ideal technical indicator, according to Andrew Cardwell, Jr., is one
that offers capability to identify and monitor the current trend,
highlight overbought 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.”
Cardwell
has what he calls “Three Keys to Success: have a trading program,
patience and discipline.”
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