"I think the markets [are] beginning to understand the 'Art of the Deal' in the president's mind," said Cashin, the UBS director of floor operations at the New York Stock Exchange.
"You start off first with something very dramatic" as a starting point for negotiations, and then there's room to scale back, Cashin added.
As an example, Cashin referred to Trump's tariffs of 25 percent on imported steel and 10 percent on aluminum, which had pressured the market right after the March 1 announcement.
But shortly after, Trump said he would exempt U.S. trading partners Canada and Mexico. And then last week, the administration said it would grant the European Union, Argentina, Australia, Brazil and South Korea exemptions as well.
The tariffs "sounded like they were going to be big and originally nobody was going to be exempted," Cashin told "Squawk on the Street." "Now everyone is exempted."
Cashin also sees the same stick-and-carrot dynamic developing in regards to China.
Following Trump's announcement last week of up to $60 billion in tariffs against Chinese imports and Beijing's $3 billion retaliation, U.S. Treasury Secretary Steve Mnuchin said over the weekend he's optimistic a trade agreement will ultimately be negotiated with China.
"You got help from Secretary Mnuchin ... about trade wars really being in negotiation," cited Cashin as a reason the stock market opened so strongly on Monday following Thursday's and Friday's sharp decline. China announcing a willingness to hold talks with the U.S. in order to resolve their differences also helped support stocks.
Cashin said the markets will continue to feel "optimistic" until there's a retest of the Feb. 8 closing lows or there's a real breakthrough to the upside.