TRADING

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.

Andrew will be presenting a workshop at The Traders Expo New York in February 2013. Sign up now and be sure to attend his session.

 
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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.

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