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Are You Using the RSI Indicator Incorrectly?

04/24/2013 9:33 am EST

Focus: STRATEGIES

Andrew Cardwell Image

Andrew Cardwell

President, Cardwell RSI Edge

Andrew Cardwell explains how he uses the RSI indicator and why many traders may be using it
incorrectly.

I am here with Andrew Cardwell. Everybody talks about overbought and oversold with the RSI
but it is so much more than that. What do you think?

I have been using it since 1978, Welles Wilder's original concept of RSI, overbought, oversold,
bull and bear divergences in 70 and 30.

Divergences, Rob, are nothing more than overextensions. You see a bear divergence. It is not a
reversal signal. It shows the market is overextended and needs to correct. Same at the bottom.
You see a bullish divergence; the market corrects up, and then starts down again.

A lot of people look at them for reversal signals, put the position on, and wait for it to happen.

Yeah. I know very few people in the world, Andrew, that will look at the RSI as anything except
an indicator of when the market is overextended, but that overextension can mean a whole lot
more. It can mean that the freight train has left the station and it is on the way.
I am seeing the RSI go to 80, 85.

That is like 11 on the volume indicator for a rock band.

Yeah. If you are using a nine period or a seven period, it will probably register a 95.

Sure.

But, as long as I have been working with it, I never changed anything in Welles's original work.
It was still 14 periods, I use the 70 and 30, but I identify what I call range rules. People are, by
nature, bullish. The market rallies, people get excited, it goes beyond 70. Then the new
overextension becomes 80.

When it sells off and corrects, those that missed it just back in, the other side doesn't come down
to 30. It comes down to about 40.

And everybody says, well I missed it the first time, I'm not going to miss it this time, and it goes
back up. When you are in this uptrend, you will see the upper half of the chart, 80 and 40, and
when you go into the downtrend, people get very depressed when markets are going down, they
are buying bullish divergences and thinking it is going to rally, and it doesn't, and sells off again
down near 20. When it rallies, it only rallies to 60. The same 40 points just shifted and we've
had it in the euro. We've had it recently in the Dow.

There was a lot of loss. The momentum run early September, late September, created a bearish
divergence.

The market corrected, but when it rallied into the first week of October, had trouble getting
above 60, the range rules were shifting.
And I've heard you say that this could be an early warning sign. Nobody is really expecting it.
This could be an early warning sign that this bearish correction that we have seen in late 2012, if
we are talking about 2013 now, we could be seeing something even more extensive, and that
takes people by surprise.

I think so. It will.

We get caught up in the story sometimes but you are saying focus on the chart.

Well, I'm saying allow the market to show you what it wants to do, not what you want it to do. If
the range rules are suggesting that the market is down and has shifted, I think 2013, between here
and probably June, there is going to be a lot of volatility and a lot of things that people don't
understand.

And when people are scared, they will sell. When they are excited, they buy, which is why the
range rules are so effective. But, I think seeing the way the markets have reacted since
September, you know we started the year off, made a high in May, sold off into July, a high in
September, and then a real loss of momentum going into October.

But the market did not break really hard in October because it is usually one of the worst months
of the year so maybe the market made a low in October, and I don't really study a lot of, use a lot
of seasonals, but if the high probability is for lows to be made in October and we were making
highs and it is inverted, we could be going down into March and April.
Price Targeting Using RSI
12/30/2012 6:00 am EST

Focus: STRATEGIES

Andrew Cardwell Image

Andrew Cardwell

President, Cardwell RSI Edge

Andrew Cardwell explains how he uses the RSI indicator to do price targeting for any market.

Talking to Andrew Cardwell about price targeting in the RSI. Not many people, Andrew, think
of price targeting or price forecasting with an oscillator. Can you tell me more about that?

It’s something, Rob, that I’ve discussed Discovery when I was doing charts by hand the first 10
years I was in the markets.

Calculated the RSI every day, plotted it on graph paper, and I started to notice when the RSI got
more extended to the downside than it was before, but the price was higher, it was basically more
oversold at a higher price. So it’s like a springboard.

Then, I could take that target, the difference, and add it to the high and suggest new highs. I did
it with gold when gold was $750, I was talking to people about $1200, $1400, $1500; they
thought I was crazy.
As soon as this video’s up, I’m going to replay that thing you just said, because I’ve never heard
—I’ve heard people say everything there is to say about indicators—and I’ve never heard that
before. Do you teach people to do this?

Well, I teach it in my courses. I teach a basic class and an advanced class. In fact, I had one
basic class that I did, that did not have one person from the continental United States. I had
people flying in from other places…

Right, worldwide.

Brokerage firms… and I still teach it, but I don’t teach it live. It’s still in the audios and
manuals, CDs.

So it’s not just price—it’s not just overbought and oversold; there’s price forecasting, but it’s not
just that either. It’s trend change, trend analysis, as well.

You can use the range rules and then put moving averages on the RSI and on close, and I watch
the shorter-term moving average to cross the longer term on both the closing price and the RSI
value, and then when they’re in up, it gives me guidelines for trend, the range rules. If I see a
bearish diversion, it’s just an overextension…

Oh, I love that.

That comes in an uptrend. It sells off into what I call these positive reversals. We’ve got an
article on MoneyShow.com. On the range rules. When I started, as I said, the first 10 years, I did
not have a computer. I was plotting these everyday by hand, so I looked at how that one point—
where that was in relation to every other point on the chart.

In your daily routine, are you—do you start with the longer term?
Daily—daily and weekly. I have clients that use what they’ve learned in my courses and what
I’ve taught to look at weekly charts for mutual funds. But I’m primarily daily. Have an idea—
you always want to know what the longer-term trend is underlying what you’re doing. If your
longer-term trend is down and you’re a buyer on your hourly charts…

You’ve got to be careful.

You’ve got to be quick. But, if your trend is up on your daily charts, your range rules are up, the
moving averages are. You buy dips. This is how you allow the market to show you what it
wants to do. So many people fight the market.

I have what I call golf course trades. Put it on—I’m not going to be sitting in front of the
computer all day. I put it on, put my stop in, figure out what my targets are, and most of them
are three-and-a-half or four-to-one reward to risk.

You have to look at probability. So many people say what’s the trade? It’s three-to-one. What’s
the probability? You could flip a coin.

You really don’t know anything unless you know both of those numbers.

Your risk, reward, and your probability is what separates traders from investors, and my
definition is everybody starts as a trader. You buy, you sell, you’re going to take your losses.
The ones that put that trade on, hold onto it when it goes against them, don’t use a stop, goes a
little bit more, and maybe dollar cost average, which everybody says oh yeah, it’s low—it’s a
better deal now, but they become investors.

Right. You’re in it for the long term now, baby.

You’re a major investor in the company.


How to Use RSI Beyond Momentum
12/29/2012 8:00 am EST

Focus: TRADING

Andrew Cardwell Image

Andrew Cardwell

President, Cardwell RSI Edge

Andrew Cardwell describes how he uses RSI to gauge momentum, plus much more, on any time
frame and in any market; including as a sentiment indicator.

Most people think about oscillators like the RSI or other indicators as pure overbought and
oversold indicators or just measures of momentum. I’m here with Andrew Cardwell. The RSI
isn’t just about momentum, is it?

It’s a momentum oscillator and depending on the time period, I mean I use it for everything,
weekly, daily, monthly, hourly, fifteen-, five-minute charts.

Short-term to long-term run again?

It doesn’t change. A lot of people shorten up the time period. But all you’re going to do is get a
wider oscillation in.

That just moves all over the place.


You might be 90 down to five, but what I like about it is what I call PRIMOTIS. It’s my
acronym for Price, Momentum, Time and Sentiment.

Does the RSI cover all of those categories?

It covers all of it. You can see how price changes because basically oscillator is measuring the
rate at which prices are changing over certain number of days or weeks or hours. The time
element, you can look at the number of periods between bottoms or peaks in the RSI. Major
lows, major highs, how many weeks it was if you’re doing cycle analysis.

As far as the sentiment indicator, if you see those range rules that we talked about earlier, it gets
up to where it’s near 60, then it’s gone down again.

To give an example of that, there’s so much talk about sentiment and seasonality and whatnot,
but the Relative Strength Index, the RSI, what you are an expert in, applies to the euro-dollar, for
example. We saw a rally in the euro-dollar in late 2012, but it couldn’t break these 60 levels.
That’s an indication that the enthusiasm, the sentiment, isn’t there either. It’s not just
momentum.

Well, a lot of people gave up on it. But it had that big run up into the 147, 148, and then we
started to see loss of momentum, a range rule shift again. One of the patterns I look for are these
positive and negative reversal patterns. As far as the RSI gets more overextended at lower
prices, so it’s more over bought than it was before.

But I don’t use the words overbought or oversold. I use the word over extended because the
market is truly not oversold until I get the inverse or what I call a positive reversal.

Right, so it might have done something extraordinary or extended, but not necessarily oversold
or over bought.
No, because the overall trend in the euro has been down since it hit that 147. I think you’ll see
110, 115 within the next year.

We couldn’t even crack 130, so what’s to say we can’t get above 130 in a somewhat bullish
environment.

Well, we just had a negative reversal show up, one of these negative reversals show up, in the
euro-dollar daily charts and it’s forecasting down under 125, 124. But, we get down under those
levels, then you’re going to be testing the old lows at 118, 119.

Yeah, 115, below that.

115, yeah.

Can we go lower than that? For the people out that there that watch the currency market, can we
see 110 again?

105. We have to see 115 and 110 to get to 105. It’s going to take time, but as I said earlier with
the volatility, there’s going to be an increase in volatility and a lot of people aren’t going to
understand it. So, the targets for the euro. I still think gold, people will go to gold. Gold is
basing again.

Silver?

Silver, I think, will go over $50. There’s a lot of support at 32. I think looking out down the
road, people talk about the quantitative easing, the money supply, and the debt. You look at the
chart, you look for the range rules, and you look at the patterns. I even use with the range rules, I
do a moving averages on RSI. If the RSI value goes below 40, that says the short-term trend
should be down.
If a nine-period moving average goes below, it’s telling me the intermediate trend is down.
That’s what we’re about to see in stocks.

Using RSI to Find Great Trades


12/06/2012 1:00 pm EST

Focus: TRADING

Andrew Cardwell Image

Andrew Cardwell

President, Cardwell RSI Edge

Andrew Cardwell is a pure technical trader who uses RSI almost exclusively to find good
opportunities in the markets. In this interview, we talk with Andrew about his special twist to
standard RSI settings and the one simple thing he uses in conjunction with RSI to make it even
more accurate.

Tim Bourquin: Hello, everybody, and thanks for joining me for another interview today. My
guest today is Andrew Cardwell. He's an expert in RSI, and we're going to talk to him today
about how he uses it to find good opportunities in the market. So first of all, Andrew, thanks for
joining me on Skype this morning.

Andrew Cardwell: Tim, it's great to be with you. I'm glad we had the time.
Tim Bourquin: All right. So your Web site is all about RSI. Why RSI? What is it about RSI that
attracted you initially?

Andrew Cardwell: Well, I started as a broker way back in the dinosaur age, in the late '70s, and I
was basically just a salesman for the firm. We were raising capital for the fund manager that
traded through us who had an excellent track record. While I was making sales calls and he's
discussing his performance I just got interested in technical work. I was an economics major in
school so I was used to looking at charts and a student—not a student—another client at the
office of my boss was using the RSI he had found in the Stocks and Commodities magazine back
in '78. He shared it with me, and I started calculating values every afternoon and plotting them
on graph paper. In fact, the first ten years I was in the business I didn’t even have a computer. I
calculated the RSI values on a spreadsheet for about 15 markets and plotted them.

Tim Bourquin: Now, is it one of those indicators that you have various settings for or is there one
setting?

Andrew Cardwell: Well, it's the standard Welles Wilder RSI that Welles developed in the
mid-'70s. Most people look at it as an overbought/oversold tool. It has a range of 0 and 100 with
an oscillator that swings up and down and supposedly identifies overbought and oversold. It's a
very widely followed, but very less understood, indicator because most people are looking just
for 70 and 30 and that's what Welles had talked about—overbought levels, oversold levels.

But it will show divergence when price goes to a new high and the oscillator fails to achieve a
new high or the inverse. When price goes to a new low, the RSI makes a higher low, basic
divergences. But divergence is not a reversal signal. It's not the end of a trend. I found working
with it that it would blow right through that divergence and go to a new high and a new
momentum high. So it's not an overbought/oversold as much as it shows that the market is
overextended one way or the other.

Tim Bourquin: Okay, so I might use this then to not say it's oversold or overbought, I need to get
in or get out. It is this one is reaching an area where it may reverse sometime in the near future?
Andrew Cardwell: It's just showing that it's overextended and due to make a correction or a
pullback from overbought or a rally from oversold. Where Welles had talked about 70 and 30 by
plotting something everyday especially back then it was 15 different markets, I was looking at
the grains, the livestock, the cotton, the sugar, and I started following gold and silver, then the
currencies and the interest rates and then after we started following the S&P futures.

But I found that people are by nature bullish. So what I did, Tim, was I adjusted the range and
when the markets appear to be in an uptrend I would look for 80 and 40 as that 40-point range.
When it went into a downtrend I found the RSI tended to top out just below the 60 level. So I
started using 60 and 20, and this is where I defined what I called my range rules. I have students
and clients who use it in mutual funds, stocks, futures, currencies, all types of markets.

So the RSI to me is an ideal indicator because it's incorporating not only price and momentum
but it can also be used as a sentiment tool to see when most people are bullish, they get excited,
it's going to go through the 70 level. When it corrects, it's not going to correct all the way down
to 30. It will come near 40 and those who missed the train first out of the station are more apt to
jump on it because by then you've established enough of a trend.

NEXT PAGE: What RSI is used for

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Tim Bourquin: So it's not particularly an entry or exit tool and it doesn’t really give you a
particular level at which point you say it's ready to reverse and it's time to get in?

Andrew Cardwell: Oh, the way I use it and the way I've taught my students and my clients to use
it, it's for trend analysis, identifying trend change and setting price objectives in the future in a
new trend because if it gets overextended, you're going to have correction. Well, when the
market corrects and the RSI sells off and goes to a lower level than it did previously but the price
is higher, that's what I call one of my positive reversals. I'm then able to take the difference and
add it to the last high and suggest new targets in the future in the new uptrend and say it's still
going in that direction.
Tim Bourquin: Okay. Do you use this, say, for instance, if you've got an RSI that has a number
on the S&P 500 and then you've got a stock within the S&P 500 that maybe is normally in line
with that but is diverged, is that an opportunity as well maybe to see that something will change
with an underlying stock?

Andrew Cardwell: You know yourself that not all stocks follow the trend of the market. I mean
80% of them will run in the direction of the overall trend. This is how we use it for sector
analysis too. You might look at the S&P and it looks like it's getting a little ahead of itself but
there may be a particular sector or something within the S&P that is showing these positive
reversal patterns that say even though the overall sector or index is a little toppy and may correct,
this looks like it's stronger.

So we're not judging relative strength to an index. We're using the RSI to measure the rate at
which prices are changing against that particular issue itself. Some people get confused. They
say, "Well, I know relative strength. Well, relative strength is how is that stock is performing
against the S&P." It's a relative strength index that's saying what is this RSI showing as far as
this particular issue relative to where it's been and where it’s going?

Tim Bourquin: Do you do a scan every weekend, every night, to find out which of the things and
markets you're looking at are overextended?

Andrew Cardwell: The positions that I take are based on the general guidelines I have, like I
mentioned, the range rules. I'm going to run a scan or a filter and say which stocks are in the
above 40 RSI, have not been below 40 in, say, the last three to four weeks. I apply moving
averages to the RSI to take out some of the volatility and say is this shorter term, in this case, the
9 above the 45 on RSI and I also use a 9 and 45 day moving average on close to identify first the
trend. If I'm scanning for these or for these filters, then I have a list of which issues. And I'm
primarily futures but I'm following currencies and cross rates—the indices, gold, silver, oil—
anything that anybody is trading.

A lot of my trade ideas come actually from my course students. They'll send a chart to me and
say, "Have you taken a look at coffee? Have you taken a look at cocoa? The range is shifting to
the upside." So we can use the range rules as a scan or filter to identify those that should be an
uptrend in this 80-40 range or ones that are in a downtrend between 60 and 40. I scanned quite
often primarily two or three times a week just to look for potential set-ups to where the range
rules are shifting. We've seen one of these positive reversal patterns that suggest something is
ready to break out and take off to the upside or if the RSI is having trouble getting back above
60, being able to tighten up stops or take partial profits around divergences.

If a market has gotten a little bit overextended and we see a bearish divergence, we can tighten
up the stock, we can take partial profits and let it correct and sell off into a new positive because
the positives set the trend and they set a price target in the future, which is first resistance. But
when it clears that price level, it confirms that the trend is still up in the case of a positive or
down in the case of a negative. So it's not until we see a negative in an uptrend that we say it's
reversed.

Tim Bourquin: What is RSI right now telling you about the overall market or maybe a favorite
futures market that you're looking at right now that maybe is showing some good opportunities
via RSI?

Andrew Cardwell: Well, they're all my favorites. Right now it looks as if stocks just around the
election, and I'm talking in terms of the Dow and the S&P. Right in about mid-October you can
look in an RSI chart and see that the RSI had been up above 70, about mid-September, and it
sold off and then early October got barely above 60 up to about a 62, 63 and then in late October,
mid-to-late October, it's not been above 60 cents. So we had a sharp selloff right after the
election that took us down in the mid-November.

This just looks like a countertrend rally. I'm viewing it as an overall topping pattern. I'm very
careful to—I've always been this way after 30 some years to come out and say something unless
I've crossed my T's and dotted my I's. But you get a feel based on experience, based on trial and
error over the years like I did to establish rules and patterns and everything. But I get a feeling
right here, the way the charts are leaning, that this doesn’t have a lot more upside. It could be the
fiscal cliff talk, the euro crisis, people worried about the tax structure, how much are they going
to pay, what's Obama Care?

There's a lot of things crossing people's minds right now, which are creating a lot of short-term
trading where people aren’t willing to hold on to anything. But I'm seeing a topping process that
tells me that we're probably pretty close to a top and could sell off between now and the end of
the year and something could last a while. So I'm leaning to the short side—not the short side but
telling people to be protective, tighten up stops.

NEXT PAGE: A longer term outlook

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Longer term, I'm still a bull on gold. We were seeing range rules. We saw positive reversal
targets. We were long from under 1200 all the way up. We had targets at 19 in the quarter to
1950. So when it got there, again, it got overextended. We've had some corrections. I think we
sold off recently to an area of support in the 1675, 1700 level long term that I think is going to be
the base for a move into next year that could carry gold back up to the highs that we saw before
and exceed the highs. I actually expect to see 2250 to 2100 by maybe June of next year.

Currencies, still short the yen versus the dollar, long euro versus dollar. But I think the dollar is
going to be strong for a while and gain on both the euro and the yen. So I think there's a lot of
currency plays. I think there's a lot of market situations that are developing. We should see
extend through the first part of the year. What's great, Tim, about being technical is—I did a
webinar I titled Today's Technicals Write Tomorrow's Headlines. A lot of times a market will
not move—it will move but we will not know why it moved on a fundamental or informational
basis until a later point. But when we see that fundamental news and then we go back and look at
the charts and say, "Why didn’t we see that?"

That's where I've been fortunate with the RSI, the range rules, the fact that I see a positive telling
me a market has changed direction from down to up and that it's going to be moving up or I've
seen it in an uptrend and get a warning that it's topping out. We don’t know the fundamental
reason why it topped out until later. So I had one—John Murphy called me—it was John Murphy
or Greg Morris—said I was a technician's technician, that I don’t read newspapers. I just look at
the overall structure of a market to determine where I think it's going to go to.

Tim Bourquin: Yeah, you're one of the guys that feel like, "Everything I need to know is in the
chart," right? "I really don’t need to follow anything else."
Andrew Cardwell: Pretty much. My wife says, "I think the charts talk to you. You get a feel for
charts when you plot the RSI value each day. You don’t think one day is that significant, but you
see that one point on a chart or on a graph with the RSI that—how it feels, how it fits, and how
it's related to everything else on the chart."

Tim Bourquin: How long do your trades usually last when you're using RSI to find
overextended?

Andrew Cardwell: Well, I've got some students and clients who—we put a trade and sometimes
myself I've been in some trends for three months if it's a strong moving trend. But the beauty of
the work is the fact that it doesn’t matter if you're using stocks, futures, currencies, cash, cross-
rates and it doesn’t matter on the time frame. Welles defined—when he developed the RSI—it
was a 14-period.

Well, I use 14-period on a monthly, weekly, daily, hourly, 15-minute chart, 5-minute chart. The
rules don’t change depending on the temperament and investment objective of a trader. I have
some traders that trade only in 5-minute charts, and they may make ten trades in a week. Some of
them will make five trades in a day. My personal approach is what I called DH5—daily, hourly,
5-minute. I should see when a market is ready to turn.

All three time periods show basically the same thing. In other words, get a buy signal in each one
of those time periods. But I can sometimes average three to four weeks in a trade. If a trade is
very strong, something that I can see lasting a lot longer, I look at time cycles also—four weeks,
six and a half, nine weeks. As long as with these positives I'm seeing these objectives met on the
upside, see bearish divergence form, I take some profit, see a correction, add to the position.

So I basically trade in the direction of the trend as long as I'm seeing those objectives. Most of
my reward, the risk ratios are three-and-a-half or four-to-one. So if I put a trade on a Monday and
all of a sudden it moves too fast because quite often a market will make a low or make a high for
trend change and you'll see an initial entry point. You get into the trade and two days later it's
moved a lot more than you thought it would. So very quickly it gets overbought or overextended.
I'll sometimes take that tradeoff, let it correct back, and I'll probably enter a little bit higher than I
did the first time. But when you look at a bar chart, you want to see a low, a secondary high or
low, a third high or low that you can draw a trend line. You can draw all trend lines when your
bar charts based on RSI values, which then become objective as opposed to subjective. You get a
chart and put it in front of a couple of people. They could turn around and draw all different
trend lines based on their biases.

Tim Bourquin: So RSI allows you to objectify that which is what you want because you don’t
want your emotions to get involved in deciding when to trade. RSI kind of solves it for you.

Andrew Cardwell: Well, it keeps the emotion to a minimum. I've always used three keys to
success I talk to people about when I give a presentation—methodology, patience, and discipline.
The discipline to follow your rules, stay within your rules, control your emotions; and the
patience to, as I quote, say allow the market to show you what it wants to do, not what you want
it to do. Well, a lot of people force the issue. Nobody holds a gun to my head to tell me what to
trade.

NEXT PAGE: A look at Andrew Carwell's upcoming New York Traders Expo presentation

Tim Bourquin: Right. Well, and speaking of presentations, you did one at the recent Las Vegas
Traders Expo. What kind of things—sounds like you talk about that. What else did you talk
about in that presentation?

Andrew Cardwell: Well, I didn’t get to do a presentation in Vegas. I'll be doing one in New York
in February.

Tim Bourquin: Oh, great. Even better. So people will be able to sign up for it.

Andrew Cardwell: Yes. I did an interview for the Website, Moneyshow.com, with Rob Booker.
We were talking about that the RSI is much more than an overbought/oversold indicator, the fact
that it incorporates price, momentum, time, sentiment, and the fact that most people look at it just
as an oscillator and try and sell 70 and buy 30. It's more than just an oscillator. It's a trend
following, trend identification approach with oscillators knowing when it's overextended taking
profits. When it's overextended to the downside, watch for a bottom.

When I speak in New York, I'm going to speak specifically on that. That's the title of my
presentation, Trend Analysis, Trend Change, and Price Forecasting. It's a very dynamic tool and
very underutilized. People just pass it over and say, "Oh, that's just like any other oscillator. It
goes between zero and a hundred. You sell it 70 and you buy it 30." If you're in a strong, strong
downtrend, then when it gets down to your 30, if you start buying and it rallies and creates one of
these negative patterns that suggests even lower, you'll say, "Well, I'll just buy more."

That leads to dollar cost averaging, which is a rich man's way to the poor house really because
the market can go deeper in a downtrend than you have money in your pocket. When you think,
"I can't take anymore," that's usually when the market made a bottom and turned up.

Tim Bourquin: All right. Well, great, well, listeners, you'll be able to sign up for Andrew's
workshop that New York Traders Expo. Check it out at moneyshow.com.

Andrew, give us your Web site as well if people want to find out more about how you use RSI.

Andrew Cardwell: Yeah, I kept it real simple, cardwellrsiedge.com, because every trader wants
an edge and the edge is to, first of all, be patient, control your emotions, and follow your
guidelines, follow your rules, whatever trading program you have. Most people get too
emotional, get too excited, and don’t follow rules. Your rules are what's going to keep you
straight. I saw something that was very interesting. You know, Tim, before we talked I said I had
to run out and I'll be back, I saw something on a sign at a church that said, "Practice makes
perfect so watch what you practice."

Tim Bourquin: Makes sense especially in trading.

Andrew Cardwell: Yes. If you think about it, if you are constantly breaking your rules and you
don’t change it, that's what you've created. I've taught students in my courses that I teach, golf is
like trading. It's 80% mental and 20% psychological. You have a club in your hand, you swing
the club, the ball gets in the way, and you're not hitting the ball. You're actually swinging the
club but you just learn how to swing the club. If you break the rhythm or change something,
you're going to see the effect of the direction of the golf ball.

Well, it's the same thing with trading. If you start to bend the rule—the worst thing a trader can
do is be successful right out of the gate because then they think they did it on their own and they
know what they're doing and the next time they're not following the rules. You have to have a
trading plan. You have to have discipline. No one is going to be right every single time. Major
league baseball players win batting titles batting 350. They're only getting 35 hits out of every
hundred bats.

We're a trader. We go to the market, and we know we're going to try and make profits, we're
going to take losses, but you have to be willing to admit when you're wrong because the most
successful traders in the world are only right 30% to 40% of the time just like batting title.
You're not going to hit a home run every time. You don’t try and hit a home run. Try and
understand what the market is showing you.

I was very fortunate when I started working with the RSI, like I said, I've studied Elliott, I've
studied Gann, I've studied so many different things. Even nowadays, Tim, I know you're not as
old as I am, but when I started, everybody was basically fundamental and looking at profit
earnings and ratios. I started looking at charts, and I was fortunate I've had somebody show me
the RSI or share the RSI article with me. It can be a complement to anything else you're using. It
can stand as an independent trading model, and that's what I've taught my students in my
courses.

I have some Elliotticians that are great Elliotticians and they tell me that it helps them to
understand wave structure. I have some who study basically Fibonacci patterns and they say
what you've shown in your range rules when I see a certain range being tested like the 40 and it
should be support then it complements what I'm doing in my Fib work.

So I've been very fortunate to meet a lot of people over the years through my courses and I've
tried to teach them what I taught my son when my son and his friends were playing Little League
and I was a baseball coach. The better you learn to play a game, the more fun the game will be.
Tim Bourquin: Andrew, thanks very much for your time today. I really appreciate it. Listeners,
you can go to Andrew's website and check it out there. Andrew, we will see you in New York.

Andrew Cardwell: I look forward to it, Tim, and it was great to see you in Vegas when we did.
We'll see you up in New York City.

Trend Analysis Using the Ideal Indicator


10/29/2012 6:00 am EST

Focus: STRATEGIES

Andrew Cardwell Image

Andrew Cardwell

President, Cardwell RSI Edge

One of its foremost experts, Andrew Cardwell of CardwellRSIEdge.com, offers words of


wisdom on the optimal use of this classic trend indicator.

The ideal indicator would be one which offered the capability to identify and monitor the current
trend, highlight overbought and oversold extremes within that trend, and give early warnings of a
trend change. The Relative Strength Index (RSI) is such an indicator, offering the best of all
worlds.
The RSI is probably one of the most dynamic and powerful indicators available to today’s
traders. One of the most widely used, it is available on almost every technical analysis software
program. It is also one that is most often misunderstood, misused, and underrated. The RSI can
be used as either a completely independent trading model or an enhancement of your current
technical approach. As a completely independent trading program it can be used for identifying:
Trend, Support and Resistance, Overbought/Oversold Levels, Divergence (Bullish/Bearish),
Trend Change and Reversal, and Price Targeting.

Most technical indicators employed by traders can, in general, be categorized as either trading or
trending technical studies. Momentum oscillators are usually considered to be trading indicators,
as they use market volatility to identify overbought or oversold valuation levels. Moving average
systems would be considered trending studies, as they smooth volatility to help identify and
monitor the current trend. Of course, the length of the moving average selected, or time period
assigned to the oscillator used, should be predicated on whether it is for shorter term or longer
term trading.

Divergence

The RSI was originally developed by Wells Wider (Trend research, Hendersonville NC) in the
late 1970’s. It was designed as a momentum oscillator to help identify divergences (non-
confirmations) between price movement and momentum. The basic premise was twofold:

1. That momentum would peak before price in an uptrend or bottom first in a downtrend,

After a correction as price made a new high (or low), momentum would fail to make a new high
(or low), and not confirm the new price movements.

This non-confirmation is characteristic of most momentum-based indicators and has been duly
noted and accepted as divergence. Basic price/momentum divergence can and does help to
identify an extreme overbought or oversold condition in the market’s momentum. However,
most traders fall prey to this concept of divergence and see it as the end or reversal of the
prevailing trend of the market. When bearish divergence develops, the bears come out of
hibernation and want to sink their claws into what they feel will be the next bear market. As
bullish divergence develops, the bulls are ready for a reversal of trend and the start of a bullish
stampede to the upside.
NEXT PAGE: Importance of Trend |pagebreak|

All would be right with 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 (lows), which will keep the RSI at overbought (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.

chart

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Importance of Trend

Most traders and analysts use RSI as an oscillator to identify overbought/oversold levels and
divergences, but those are just two of its analytical applications. The RSI’s more dynamic and
significant contributions as a tool are its ability to:

Identify the current trend and keep the trader positioned property in the direction of that trend;
and,

When market conditions develop, give early warning of a possible impending trend change,
whereby the trader can reverse the position.

Since markets generally trend approximately 60-70% of the time, trend analysis, identification
and change should be foremost in the mind of the trader. The ability to recognize a trend change
quickly, reverse a position, and trade in the direction of that next trend is the skill which traders
must develop to be successful.

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. When positioned properly with the trend
there are also fewer trading decisions that have to be made. Since markets trend, any surprises
which may develop in market activity are usually in the direction of the intermediate and longer
term trends.

chart

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RSI Ranges

The parameters for the RSI values are 0-100. Extremes for overbought and oversold levels vary
slightly, depending on the period value selected by the trader’s perspective. Day traders or
shorter-term traders will generally employ values such 3, 5, 7, or 9, and longer term traders
usually use either 9, 14, or 21. The original value of the period established by Welles Wilder was
14, which was based on being the half-cycle length of the 28 day or lunar cycle. Using the 14
period value on close as the standard for most of the markets we follow, we use the following as
guidelines:

Ranges of RSI

Normal Range: 30-70

Uptrend (Bull Market): 40-80

Downtrend (Bear Market): 20-60


Trading Range: 40-50 points

NEXT PAGE: The 3 Keys to Success |pagebreak|

chart

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We consider the “normal” range to be the levels between 30 and 70, which is where 60-70% of
trading activity takes place. When a market is in a gradual uptrend (or downtrend) the RSI will
normally ebb and flow within this range as the market trends higher (or lower). The levels for an
overbought market can range from 70 up to 80 or 90, depending on the time period selected. For
an oversold market the range may be from 30 down to 20 or 10. Taking the average of the
overbought and oversold values we established 80 and 20 as better values for consideration of
overbought and oversold levels. The standard 14-period RSI normally stays within a range of80
and 20.

People are bullish by nature, so when markets start to move we must adjust for this shift in
sentiment and psychology. When sentiment is extremely bullish, momentum takes prices to
higher levels. We adjust the range of RSI to account for these higher levels. Using the same 40
point range based on the 30 and 70 point values, Uptrends show 80 as overbought and 40 as
oversold. As long as the market stays within the 80/40 range (uptrends), we should see prices
make higher highs and higher lows.

When sentiment is extremely bearish, momentum normally takes prices to lower levels due to
liquidation and the absence of buying. Applying the same 40 point ranges for downtrends, 60
shows as overbought and 20 as oversold. As long as the range of 60/20 remains intact, we should
continue to see lower lows and lower highs. Taking note that the range has shifted from 80/40 to
60/20 should be a strong indication that the trend has shifted from being in an uptrend to being in
a downtrend. By employing range analysis to RSI, not only can a trader identify uptrends from
downtrends, but he will also stay with the trend longer than he normally would have and hold a
position for maximum capital appreciation.
chart

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As an exercise to further educate yourself, take the time to go back and review your trades over
the last 6-12 months and apply the 80/40 and 60/20 range rules. You will probably realize that
you were positioned properly in a trend, and even though you made money on the trade you
offset the position much too soon. If you lost money on a trade, you were probably short in an
uptrend (80/40) or long in a downtrend (60/20).

The 3 Keys to Success

If you include the guidelines, which I have presented here for RSI range analysis, I believe you
will find that they will help you make better trading decisions and stay in tune with the trend. As
a final note, always remember the “3 Keys to Success,” trading program, patience, and
discipline. Follow your trading program, have the patience to wait for the signal, and the
discipline to stay within the parameters of your program and stay within yourself.

Andrew Cardwell can be found at CardwellRSIEdge.com

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